Most sanctions cases start where you’d expect: a prohibited customer, a blocked payment, or a shipment to the wrong country.
This one started in Accounts Receivable.
A sophisticated global consulting firm found itself paying more than $1 million to settle sanctions allegations—not because it secretly worked for a sanctioned Russian bank, but because its law firm paid its invoices late.
Yes, late invoices.
That result came courtesy of Office of Foreign Assets Control (“OFAC”), the Treasury Department agency responsible for enforcing U.S. sanctions. For multinational companies, the case is a reminder that sanctions risk doesn’t end when the contract is signed.
Sanctions are now one of the US Government’s primary methods of economic warfare…and enforcement activity is growing exponentially. As we recently discussed, you can get in trouble for:
- going to a casino;
- hiring a lawyer; or
- giving a ride to a human rights activist. (Click here for more details.)
Now, we include “inaction by third parties”: late invoices.
What happened?
FTI was retained in connection with litigation in Singapore involving VTB Bank, a Russian bank subject to sectoral sanctions. Recognizing the sanctions implications, FTI structured the engagement through a law firm, invoicing the firm rather than VTB directly.
Between 2019 and 2021, FTI issued six invoices totaling approximately US$354,000. VTB Bank repeatedly failed to pay on time, leaving invoices outstanding well beyond the 14-day maturity limit applicable under OFAC’s sectoral sanctions restrictions. Despite the continued delays, FTI continued performing services, issuing invoices, and communicating directly with VTB regarding payment.
OFAC concluded that (1) FTI had effectively extended prohibited credit to VTB Bank on six separate occasions, and (2) the intermediary law firm did not alter the economic reality that VTB Bank was the true client, the economic source of payment, and the party bearing ultimate responsibility for the invoices.
In other words: the sanctions issue wasn’t created by the contract…it was created by the way payment terms were administered. The result: a $1.05 million settlement.
Lessons for International Corporations
1. “Indirect” Doesn’t Protect
Routing the arrangement through intermediaries does not eliminate sanctions risk, especially if the sanctioned party is your real economic obligor. Companies cannot do indirectly what they are prohibited from doing directly. Companies should ensure that contractual structures don’t obfuscate counterparties subject to sanctions screening.
If OFAC ignored the paperwork and looked only at the economic reality, how much risk would you be incurring? In other words, how many of your distributors, agents, law firms, consultants, JV partners, and payment intermediaries could be standing between your company and a sanctioned counterparty?
2. Sectoral Sanctions Are Serious
It’s easy to focus on blocked parties (SDNs). It’s more difficult to apply OFAC’s “50% Rule.” (See here, here and here.) What’s even more complicated? Sectoral sanctions.
Sectoral sanctions can create a false sense of comfort. The FTI settlement underscores that sectoral sanctions impose real and enforceable restrictions, particularly with respect to debt and credit arrangements. Invoice terms, payment delays, and extensions of credit all require careful scrutiny.
Are you sensitized to sectoral sanctions risk?
3. Unpaid Invoices Can Become Sanctions Violations
Most companies treat unpaid invoices as a credit or collections problem. OFAC treated them as a sanctions problem.
Allowing payment obligations to remain outstanding beyond the permitted period effectively amounted to dealing in prohibited debt.
The enforcement action highlights the importance of ongoing monitoring throughout the life of a relationship. New facts—late payments, direct discussions with the sanctioned party, or evidence that an intermediary has not assumed payment responsibility—should trigger renewed legal review.
Many companies continually screen their higher risk counterparties; typical screening platforms would flag VTB Bank as subject to sectoral sanctions. Screening should extend into accounts payable, credit management, contract amendments, and collection negotiations.
Are red flags communicated to your accounting/finance department?
4. Sophisticated Firms Are Held to Sophisticated Standards
Compliance programs create protection—but they also create expectations. OFAC specifically cited FTI’s size, expertise, and compliance sophistication as aggravating factors. In other words, having a robust compliance function is not merely a mitigating factor when things go wrong; it can also increase expectations regarding what the company should have recognized and addressed.
Would your company be expected to understand similar nuances?
The Bottom Line
The real value of the FTI settlement is not the penalty amount, but the uncomfortable questions it forces companies to ask:
- Do we know our ultimate counterparties?
- Are sanctioned parties benefiting indirectly from our services?
- Are overdue invoices creating sanctions exposure?
- Does our sanctions review continue after contract signing?
- Can our finance, sales, legal, and compliance teams identify these issues before OFAC does?
The FTI settlement illustrates a recurring compliance problem: sanctions risk often emerges far from the legal department. It can surface in accounts receivable, collections discussions, contract administration, or routine business decisions that were never viewed through a sanctions lens.
If your organization operates internationally, now is a good time to ask whether your sanctions controls extend beyond onboarding and screening into the day-to-day realities of how business is actually conducted.
That’s where we help. We work with companies to identify hidden sanctions risks, strengthen compliance programs, and ensure that operational teams recognize issues before regulators do. Need some help? Contact us today!
