Financial Regulatory Forum

SEC is watching, on the Web, for sanctions evaders

By Guest Contributor
February 25, 2011

Feb. 25 (Westlaw Business) Big Brother has his eye on more than just filings: He is also surfing the Web to corroborate corporate disclosures. Staff correspondence filed by Scottsdale-based Hypercom Corp. shows that when it comes to rooting out potential sanctions-evaders in Iran and Syria, the Securities and Exchange Commission keeps close tabs.

DLA Piper attorneys Steven D. Pidgeon and Nicole L. Campbell (Phoenix) assisted Hypercom with its response to the Commission.

Submitted in October 2010, the seven-page response to SEC Legal Branch Chief Mark P. Shuman covered a host of topics including: country-specific revenue, asset-life accounting, compensation bench-marking, and related party transactions. Most striking, however, was the attention to detail the SEC staff paid to not only Hypercom’s filings, but even (dubious) internet claims of affiliation by third parties. The SEC asked:

“We note from pages 2 and 45 of your Form 10-K that one of your business segments includes the Middle East and Africa regions. Iran, Syria and Sudan, countries generally understood to be included in references to the Middle East, are identified by the State Department as state sponsors of terrorism and are subject to U.S. economic sanctions and export controls. We also note from the Silicon Iran website that DPI (Data Processing Iran), an Iranian IT company, is one of your partners. In addition, it appears from October 2008 and November 2007 news articles that your customer STS (Specialized Technical Services) of Jordan, a Master Distributor of Hypercom, has distributors in Syria and an IT cooperation agreement with Al Khayyat Group, an agent for Iran Khodro. It appears from May 2007 and July 2006 news articles that Al Rajhi Bank of Saudi Arabia, which provides services in Sudan, deployed your company’s payment terminals.

“We note that your Form 10-K does not include disclosure regarding contacts with Iran, Syria or Sudan. Please describe to us the nature and extent of your past, current, and anticipated contacts with Iran, Syria or Sudan, whether through subsidiaries, resellers, distributors or other direct or indirect arrangements. Your response should describe any services or products you have provided to Iran, Syria or Sudan and any agreements, commercial arrangements, or other contacts you have had with the governments of Iran, Syria or Sudan, or entities controlled by these governments.”

Hypercom responded that not only does it have no suspect agreements with any of the off-limits jurisdictions, the company actually does have an export controls compliance program in place to try to eliminate even the possibility of backdoor association. It said:

“We do from time to time enter into agreements with distributors or resellers in the Middle East. In order to deter the redistribution or resale of our products or services into Iran, Syria or Sudan, as part of our Export Control Compliance Policy and our export controls compliance program we (a) include provisions in our distributor, reseller and other sales agreements that require our third-party partners to comply with all U.S. export control laws and regulations and with our Export Control Compliance Policy, and (b) each of our regional managing directors is required to contact each of our distributors and resellers by way of a letter that requests that they confirm their compliance, or non-compliance, with these export controls and with our Export Control Compliance Policy. We follow these procedures in order to help ensure compliance with applicable export controls and mitigation of significant related risks. We have to date obtained a signed letter from each of our distributors and resellers in our Middle East & Africa sub-region, including Specialized Technical Services (“STS”) and Alhamrani, a Saudi Arabia distributor of Hypercom Products and a supplier to Al Rajhi Bank of Saudi Arabia, confirming and acknowledging their compliance with U.S. export controls and our Export Control Compliance Policy.

“We have no prior, current or anticipated business relationship with Data Processing Iran (“DPI”), purportedly an Iranian IT company. We understand that the Silicon Iran website at some time may have contained an unauthorized claim that DPI was a “partner” of Hypercom or otherwise represented us. Any such claims are untrue and we are taking steps to try to prevent similar claims or inaccuracies in the future.”

With the staggering number of 10-Ks filed every year, the scrutiny that SEC staff applies to issues of sanctions continues to impress. Hypercom’s correspondence should help promote the value of a formal compliance policy for any company even remotely likely to be caught up in a sanctions dragnet.

(This article was first published by ThomsonReuters’ Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.)

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