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ExxonMobil Confronts OFAC on Violations in Russian Sanction

ExxonMobil Corporation XOM has initiated a legal confrontation to a verdict by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) for violating U.S. sanctions against Russia in 2014.

The company followed an authoritative and specific guidance from the Obama administration that OFAC retroactively altered a year later.

Per the filing, OFAC’s action is unreasonable and leads to a denial of due process under the Constitution. It dishonours the Administrative Procedure Act because market participants, including ExxonMobil, did not receive any notice about OFAC’s changes.

ExxonMobil’s communication with the Russian oil company, Rosneft and with Igor Sechin, CEO, Rosneft, form the core of the argument.

OFAC claims that ExxonMobil violated sanctions when it signed certain documents in May 2014 that were countersigned on behalf of Rosneft by Sechin acting in his official capacity as an executive. OFAC has agreed that White House and Treasury Department officials constantly stated that sanctions involving Sechin was applicable only to his personal affairs and not to companies that he controlled or represented.

On May 16, 2014, the position was confirmed by a Treasury Department spokesperson, who said by way of example that BP’s American CEO was allowed to take part in Rosneft board meetings with Sechin as long as the activity related to Rosneft’s business and not Sechin’s personal business.

Despite the White House and Treasury guidance that had already been provided, two months later, in July 2014, OFAC contacted ExxonMobil for violating the policy. About a year later, in June 2015, OFAC informed ExxonMobil through a pre-penalty notice that the company had violated guidance, which weren’t prepared when the alleged offences took place. The penalty notice was issued on July 20.

When Sechin was added to the sanctions list in April 2014, the White House and Treasury Department in several briefings and media reports particularly affirmed the sanctions applied to him in his individual capacity and relating to his personal assets, excluding the business handled by him.

ExxonMobil followed the clear guidance from the White House and Treasury Department when its representatives signed documents involving ongoing oil and gas activities in Russia with Rosneft, a non-blocked entity, that were countersigned on behalf of Rosneft by Sechin in his official capacity. At the time of the signing, those activities  were not under any direct sanction by the U.S. government.

ExxonMobil stated that a 2012 Supreme Court ruling concerning drug company SmithKline Beecham is applicable in this matter.

In the case, the court said the following: “It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.”

ExxonMobil has lost 10.4% of its value year to date versus the 6.8% decline of its industry.

ExxonMobil currently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the same space include Enbridge Energy, LP EEP, Braskem S.A. BAK and TransCanada Corp TRP. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Enbridge Energy delivered a positive earnings surprise of 128.57% in the preceding quarter. The company beat estimates in three of the trailing four quarters with an average positive earnings surprise of 38.22%.

Braskem delivered a positive earnings surprise of 107.79% in the quarter ending September 2016.

TransCanada delivered a negative earnings surprise of 7.58% in the preceding quarter. It surpassed estimates in two of the trailing four quarters with an average positive earnings surprise of 1.06%.

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