InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
OFAC sanctions North Koreans
On January 12, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13382 against five Democratic People’s Republic of Korea (DPRK) individuals based in Russia and China that OFAC designated as “responsible for procuring goods for the DPRK’s weapons of mass destruction (WMD) and ballistic missile-related programs.” According to OFAC, these sanctions are part of the U.S.’s ongoing efforts to counter the DPRK’s “continued use of overseas representatives to illegally procure goods for weapons.” As a result of the sanctions, all property and interests in property of the sanctioned individuals subject to U.S. jurisdiction are blocked and must be reported to OFAC. OFAC noted that its regulations generally prohibit U.S. persons from participating in transactions with the designated person, including transactions transiting the U.S. OFAC’s announcement further warned that any foreign financial institution that knowingly facilitates significant transactions or provides significant financial services for any of the designated individuals may be subject to U.S. correspondent account or payable-through account sanctions.
OFAC reaches $5.2 million settlement with Hong Kong company for apparent Iranian sanctions violations
On January 11, the U.S. Treasury Department’s Office of Foreign Assets Control announced a $5.2 million settlement with a Hong Kong, China-based company for allegedly processing certain transactions related to goods of Iranian origin through U.S. financial institutions in violation of the Iranian Transactions and Sanctions Regulations (ITSR). According to OFAC’s web notice, from August 2016 through May 2018, certain company employees violated company-wide policies and procedures by causing the company to purchase Iranian-origin goods from a supplier in Thailand for resale to buyers in China. Under the terms of the trading arrangement, the company made 60 separate U.S. dollar payments from its bank in Hong Kong to the Thai supplier’s banks in Thailand, transferring a total of $75.6 million. Each of these payments were allegedly “processed and settled through multiple U.S. financial institutions, including the U.S. correspondent banks of the Hong Kong and Thai banks.” Due to the noncompliant employees’ misconduct, the funds transfer instructions omitted references to Iran. As a result, U.S. financial institutions were unable to flag the transfers as violating the ITSR, which would have “caused them to reject and report each of these U.S. dollar denominated funds transfers.”
In calculating the settlement amount, OFAC considered the following aggravating factors: (i) the noncompliant employees omitted Iranian country of origin references from all relevant transactional documents over a period of two years, despite knowing and having been advised repeatedly that this conduct violated the ITSR and company policy; (ii) the noncompliant employees “had actual knowledge about the [supplier’s] relation to Iran”; (iii) the company’s actions conferred significant economic benefits to Iran, specifically with respect to Iran’s petrochemical sector; and (iv) the company “is a sophisticated offshore trading and cross-border trade financing company with ready access to experience and expertise in international trade, investment, financing, and sanctions compliance.”
OFAC also considered various mitigating factors, including that (i) the company repeatedly reminded noncompliant employees not to make U.S. dollar payments in connection with Iran-related business transactions; (ii) senior management and compliance personnel were unaware of the violations due to the concealment of the information internally; (iii) the company has not received a penalty notice from OFAC in the preceding five years; and (iv) the company voluntarily self-disclosed the apparent violations, cooperated with OFAC’s investigation, and has undertaken significant remedial measures to ensure sanctions compliance.
OFAC sanctions Chinese tech firms
On December 16, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) added eight Chinese companies to OFAC’s Non-SDN Chinese Military-Industrial Complex Companies sanctions list. The eight Chinese technology firms were identified by OFAC pursuant to E.O. 13959, as expanded by E.O. 14032, for “actively support[ing] the biometric surveillance and tracking of ethnic and religious minorities in China.” As previously covered by InfoBytes, last month President Biden extended, for one year, the national emergency declared pursuant to E.O. 13959, as expanded by E.O. 14032, involving securities investments related to Non-SDN Chinese Military-Industrial Complex Companies. Among other things, E.O. 14032 generally prohibits U.S. persons from “the purchase or sale of any publicly traded securities, or any securities that are derivative of such securities, or are designed to provide investment exposure to such securities, of” any such companies.
Additionally, the U.S. Commerce Department’s Bureau of Industry and Security issued a final rule, amending the Export Administration Regulations through the addition of 37 new foreign entities to the Entity List after determining the entities have engaged in activities that are “contrary to the foreign policy or national security interests of the United States.” According to OFAC’s announcement, these 37 entities “include 25 PRC entities that contribute to Beijing’s efforts to develop and deploy biotechnology and other technologies for military applications and human rights abuses, including four entities previously identified in E.O. 13959, as amended.”
OFAC announces human rights abuse sanctions
On December 10, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13818 against 15 individuals and 10 entities under the Global Magnitsky Human Rights Accountability Act. According to OFAC, the sanctioned individuals and entities are connected to human rights abuse and repression in several countries. The same day, OFAC announced that it imposed investment restrictions on one company in connection with the surveillance technology sector of the People’s Republic of China’s economy, highlighting the human rights abuses allowed through technology. OFAC also noted that the actions are taken on International Human Rights Day, which marks the day the United Nations General Assembly adopted the Universal Declaration of Human Rights in 1948.
As a result of the sanctions, all property and interests in property belonging to the sanctioned entities subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” OFAC noted that its regulations generally prohibit U.S. persons from participating in transactions with these persons, which include “the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person.”
Fed announces written agreement against China-based bank and NY branch
On November 16, the Federal Reserve Board announced an enforcement action against a Chinese state-owned bank’s New York branch for alleged credit risk management deficiencies. The written agreement requires the bank and its branch to jointly submit a written plan to strengthen senior management oversight of risk management and internal controls, including a sustainable governance and risk management framework. Among other things, the plan must ensure that the branch’s risk management, internal audit function, and credit risk functions maintain appropriate stature and independence, and that potential credit risks are timely escalated. Additionally, risk management roles and responsibilities must be “clearly defined” in the plan, and the bank must ensure that “data management procedures are incorporated into an effective data governance framework.” After the Fed approves the plans, the bank and branch will have 30 days following the end of each quarter to submit “written progress reports detailing the form and manner of all actions taken to secure compliance” with the provisions of the written agreement.
President Biden extends national emergency prohibiting securities investments in Chinese military companies
On November 9, President Biden issued a notice, extending for one year, the national emergency declared pursuant to Executive Order (E.O.) 13959, as expanded by E.O. 14032, involving securities investments related to Chinese military companies. As previously covered by InfoBytes, E.O. 14032 generally prohibits U.S. persons from “the purchase or sale of any publicly traded securities, or any securities that are derivative of such securities, or are designed to provide investment exposure to such securities, of” any listed Chinese military company. The E.O. also establishes deadlines for divestment of investments in companies currently listed as Chinese military companies as well as companies that later may be added to the list of Chinese military. Among other things, E.O. 14032 also prohibits any transactions by U.S. persons or within the U.S. that evade or avoid, have the purpose of evading or avoiding, cause a violation of, or attempt to violate the provisions set forth in the order, as well as any conspiracy to violate any of these prohibitions.
In continuing the national emergency underlying these actions and extending E.O. 14032, Biden stated the “threat from securities investments that finance certain companies of the [People’s Republic of China] and certain uses and development of Chinese surveillance technology continue to pose an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.”
District Court grants final approval of $92 million class action settlement over privacy violations
On August 22, the U.S. District Court for the Northern District of Illinois granted final approval of a class action settlement, resolving claims that a China-based technology company and its subsidiaries (collectively, “defendants”) violated Illinois’ Biometric Information Privacy Act (BIPA), among other things, by defying state and federal privacy laws through a social media platform and entertainment application (app). The first of the 21 putative class actions comprising this multidistrict litigation were filed in 2019, and the other 20 putative class actions were filed in 2020 in separate federal districts. Class members, comprised of U.S. residents who used the app prior to preliminary approval, and an Illinois subclass of all Illinois residents who used the app to create videos before preliminary approval, filed a consolidated amended class action complaint in 2020, claiming that the defendants harvested and profited from users’ private information, including their biometric data, geolocation information, personally identifiable information, and unpublished digital recordings. The defendants argued, among other things, that the class members consented to the alleged misconduct by accepting the app’s terms of service.
Under the terms of the settlement, the defendants must pay “$92 million in monetary relief and an array of injunctive relief for the putative settlement class.” The settlement also requires the defendants to, among other things: (i) refrain from using the app to collect or store certain U.S. user data, including biometric data and geolocation information, without making the necessary disclosures; (ii) delete all pre-uploaded user-generated content collected from U.S. users who did not “save” or “post” the content; and (iii) require a new, yearly training program for the defendants’ employees and contractors regarding compliance with data privacy laws.
SEC enters $19 million FCPA settlement with advertising company
On September 24, the SEC announced that a London-based advertising company agreed to pay over $19 million to settle the SEC’s claims that the company violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA and the Exchange Act. According to the SEC, the company “through intermediaries, paid as much as a million dollars in bribes to Indian officials to obtain and retain government business, resulting in over $5 million in net profit from 2015 – 2017.” In addition, the company allegedly benefited from other illicit schemes at its subsidiaries such as: (i) “a subsidiary in China making unjustified payments to a vendor in connection with a Chinese tax audit, resulting in significant tax savings to [the company’s subsidiary]”; (ii) “a subsidiary in Brazil making improper payments to purported vendors in connection with government contracts in 2016-2018”; and (iii) “in 2013, a Peruvian subsidiary funneling funds through other [of the company’s] entities to disguise the source of funding for a political campaign in Peru.” The SEC further alleged that the company “failed to devise and maintain a sufficient system of internal accounting controls necessary to detect and prevent the bribe payments at this Indian subsidiary or properly account for the true nature of payments and income at all four subsidiaries.”
The SEC alleged that the company had knowledge of significant red flags connected to the China subsidiary and its CEO through an internal audit in 2017, which found that the China subsidiary was employing tax avoidance schemes and other significant violations of the company’s internal accounting controls. Then in 2018, a China subsidiary employee informed a regional location officer and the company’s regional tax director in China that the China subsidiary was in the midst of a tax audit and its management may face criminal charges for its tax avoidance schemes. The SEC also alleged that despite a policy that prohibited its companies from paying third parties to assist in obtaining or retaining government contracts without the company’s approval, the “Brazil Subsidiary made improper payments to vendors in connection with securing government contracts at [Brazilian CEO’s] direction.” In respect to the Peruvian subsidy, the SEC alleged that the company “was unjustly enriched by $291,935 as a result of Peru Subsidiary acting as a conduit for a bribery scheme.”
In entering the administrative order, the SEC considered the company’s cooperation and remedial efforts. Without admitting or denying wrongdoing, the company consented to a cease and desist order, and agreed to pay a $8 million civil money penalty and approximately $11.2 million in disgorgement and prejudgment interest.
2nd Circuit: No contempt sanctions against Chinese banks in $1 billion counterfeit case
On August 30, the U.S. Court of Appeals for the Second Circuit held that a district court did not err in denying an investment firm’s motion to hold a group of Chinese banks in contempt for failure to implement certain asset restraints. According to the opinion, in 2015, an athletic apparel corporation and one of its subsidiaries won a more than $1 billion default judgment against hundreds of participants in several Chinese counterfeiting networks (counterfeiters). The judgment enjoined the counterfeiters “and all persons acting in concert or in participation with any of them . . . from transferring, withdrawing or disposing of any money or other assets into or out of [the counterfeiters’ accounts] regardless of whether such money or assets are held in the U.S. or abroad.” The investment firm (the corporation’s successor-in-interest) moved to hold the Chinese banks in contempt for failing to implement the asset restraints and asked the district court to impose a $150 million penalty, claiming, among other things, that the Chinese banks allowed the counterfeiters to transfer more than $32 million from their accounts after the Chinese banks were informed of the asset restraints. The investment firm further claimed that the Chinese banks also failed to produce documents during discovery. The district court denied the motion.
In agreeing with the district court, the 2nd Circuit concluded that (i) until the contempt motion was filed, the corporation and the investment firm never sought to enforce the asset restraints against the Chinese banks; (ii) “there is a fair ground of doubt as to whether, in light of New York’s separate entity rule and principles of international comity, the orders could reach assets held at foreign bank branches”; (iii) “there is a fair ground of doubt as to whether the [b]anks’ activities amounted to ‘active concert or participation’ in Defendants’ violation of the asset restraints that could be enjoined under Federal 16 Rule of Civil Procedure 65(d)”; and (iv) the investment firm failed to provide clear and convincing evidence of a discovery violation.
OFAC reaches $2.3 million settlement with Chinese bank
On August 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a roughly $2.3 million settlement with a UK subsidiary of a Chinese financial institution for allegedly processing transactions in violation of the Sudanese Sanctions Regulations, “which prohibited the exportation, directly or indirectly, to Sudan of any goods, technology, or services from the United States.” According to OFAC’s web notice, between September 2014 and February 2016, the bank processed 111 commercial transactions totaling more than $40 million through U.S. correspondent banks on behalf of parties in Sudan. In conducting a lookback review to identify potential Sudan-related transactions, the bank identified two customers who processed transactions through the U.S. financial system. For both of these customers, the bank’s internal customer database did not reference Sudan in the name or address fields, and messages processed on behalf of these customers by the bank through U.S. banks also failed to include any references to Sudan.
In arriving at the settlement amount, OFAC considered various aggravating factors, including, among other things, that (i) the bank demonstrated reckless disregard for U.S. sanctions regulations by processing the transactions “despite having account and transactional information indicating the Sudanese connection to the accounts and in contravention of the bank’s existing policies and procedures”; (ii) certain bank personnel responsible for processing the transactions knew that the payments were related to entities in Sudan; (iii) the bank conferred economic benefit to a comprehensively sanctioned country; and (iv) the bank “is a commercially sophisticated financial institution that processes transactions internationally.”
OFAC also considered various mitigating factors, including, among other things, that the bank (i) has not received a penalty notice from OFAC in the preceding five years; (ii) self-identified the alleged violations, cooperated with OFAC’s investigation, conducted a lookback, and entered into a tolling agreement; and (iii) has undertaken remedial measures, including enhancing policies and procedures to improve compliance with U.S. sanctions when processing payments through the U.S.