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OFAC Imposes Civil Penalty for Export of Medical Supplies to Iran
On June 23, OFAC announced a $107,691.30 settlement with a North Carolina-based medical device company for apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (the Regulations). Specifically, the company violated § 560.204 of the Regulations by exporting a number of its medical products to its United Arab Emirates distributor throughout April and May 2011 with the knowledge or reason to know that the products were ultimately destined for Iran. The settlement amount reflects OFAC’s consideration of the following aggravating factors: (i) the company acted willfully by exporting products it knew or had reason to know were ultimately destined for Iran, editing its destination control statement at the request of its distributor and continuing to conduct business with its distributor after receiving confirmation that the distributor had reexported the company’s products to Iran; (ii) the company’s former CEO and International Sales Manager knew the products were ultimately destined for Iran; and (iii) the company did not have a sanctions compliance program at the time of the apparent violations. OFAC considered the following as mitigating factors when determining the settlement amount: (i) limited harm was inflicted on U.S. sanctions program objectives because OFAC likely would have granted the company a license to export the medical products to Iran, had the company sought permission to do so; (ii) the company had no prior OFAC sanctions history; (iii) the company took remedial steps, such as establishing an OFAC compliance program; and (iv) the company “cooperated with OFAC’s investigation and agreed to toll the statute of limitations for a total of 513 days.”
OFAC Updates Iran-Related FAQs
On June 8, OFAC updated its Frequently Asked Questions (FAQs) Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA). In addition to adding nine FAQs related to Foreign Entities Owned or Controlled by U.S. Persons (see, K.14 through K.22), OFAC added two FAQs, C.15 and C.16, regarding Financial and Banking Measures. Specifically, C.15 clarifies that U.S. financial institutions “can transact with, including by opening or maintaining correspondent accounts for, non-U.S., non-Iranian financial institutions that maintain correspondent banking relationships or otherwise transact with Iranian financial institutions that are not on the SDN List.” Non-U.S. financial institutions remain prohibited from routing Iran-related transactions through U.S. financial institutions or involve U.S. persons in such transactions, unless the transactions are exempt from regulation or licensed by OFAC. FAQ C.16 addresses whether or not a non-U.S., non-Iranian entity may engage in transactions with Iranian persons not on the SDN List if one or more U.S. persons serve on the non-Iranian entity’s Board of Directors or senior managers. While the presence of one or more U.S. persons on the Board of Directors or serving as a senior manager does not, according to C.16, necessarily preclude the entity from transacting with Iranian persons not on the SDN List, OFAC stresses that “U.S. persons must be walled off or “ring-fenced” from Iran-related business.” OFAC recommended that non-U.S., non-Iranian entities consider implementing broad recusal policies to wall off U.S. persons for the institution’s Iran-related business.
Supreme Court Order Allows Victims of Terrorism to Collect from Frozen Funds of Iranian Central Bank
On April 20, the Supreme Court held in Bank Markazi v. Peterson that Section 8772 of the Iran Threat Reduction and Syria Human Rights Act of 2012 does not violate separation of powers principles. Bank Markazi v. Peterson, No. 14-770, slip op. (U.S. April 20, 2016). In a 6-2 decision, the Court concluded that Section 8772, which made certain frozen Iranian assets held in the U.S. subject to attachment to satisfy judgment in favor of persons injured by Iranian terrorism or Iran-supported terrorism, does not “transgress constraints placed on Congress and the President by the Constitution” and is not a “‘one-case-only regime.’” At issue was whether plaintiffs in a wrongful-death case related to the 1983 Beirut bombings could satisfy an award in their favor from billions of Bank Markazi’s dollars that are frozen in a New York bank account. In 2007, a federal district court awarded more than one thousand American victims of Iran-related terrorism $2.65 billion in relief. In 2013, a U.S. federal district court rejected the Iranian central bank’s argument that Section 8772 violated separation of powers principles because it was meant to dictate the outcome of the present case, and ordered the bank to pay the victims using frozen assets in the United States. In 2014, the Second Circuit affirmed the district court’s ruling. The Supreme Court’s recent decision affirms the lower court’s ruling, finding that “[Section] 8772 is an exercise of congressional authority regarding foreign affairs, a domain in which the controlling role of the political branches is both necessary and proper.”
The Panama Papers: Implications for Financial Crimes Compliance Professionals
A group of international news outlets published a series of articles this week regarding the so-called “Panama Papers;” 11.5 million documents leaked from a Panamanian law firm specializing in creating offshore companies. Offshore companies form a well-recognized component of tax planning, but have come under increased scrutiny recently. According to the reporting, the Panama Papers reveal that a large number of foreign politicians, celebrities and other high net worth individuals used opaque structures, such as limited liability companies (LLCs), personal investment companies (PICs) and trusts, to hold (and as implied in the reporting, hide) wealth offshore. Other reporting depicts the use of the offshore PICs, trusts and/or LLCs to conduct business with sanctions targets in Iran, North Korea, and Syria. A number of international foreign financial institutions providing trust administration and wealth management services held thousands of accounts for offshore companies identified in the Panama Papers, according to the reporting.
The information in the Panama Papers has a number of immediate implications for U.S. and foreign financial institutions:
- First, financial institutions should anticipate that any dealings with the Panamanian law firm at issue will be the subject of regulatory scrutiny. Indeed, it has already been reported that the U.S. Department of Justice is reviewing the documents for evidence of corruption that can be prosecuted in the United States, and the United Kingdom’s Financial Conduct Authority has directed as many as 20 banks to provide details of accounts handled by the firm by April 15, 2016. It would not be unexpected if FinCEN and/or US regulatory authorities followed suit. Therefore, those dealings, including whether they are a customer or involved in transactions with customers, should be identified and reviewed.
- Second, banks would be well served to review press reporting for information regarding clients involved in transactions with the Panamanian law firm, and reassess risks posed by those clients based on the information. As the press reporting is evolving daily, banks should establish a process for monitoring new information and incorporating that new information into their reviews. Additionally, in early May, the International Consortium of Investigative Journalists, which investigated the Panama Papers, plans to publish the names of the more than 214,000 offshore entities incorporated by the Panamanian law firm and the people connected to them as beneficiaries, shareholders, or directors. Once published, this information should be included in banks’ reviews.
- Third, the reporting calls public attention to a number of important financial crime risk issues. These include the importance of understanding beneficial ownership, especially when dealing with LLCs, trusts, and/or PICs or other potentially opaque structures, understanding the sources of a customer’s wealth (and the source of wealth of any beneficial owner(s)), conducting thorough due diligence and, in high risk areas such as high net worth individuals and politically exposed persons (PEPs), enhanced due diligence. As reported by a New York-based newspaper company on April 6, 2016, FinCEN’s Proposed Rule regarding Customer Due Diligence (see our prior analysis of this) is expected to be published within a few months.
- Fourth, Delaware, Wyoming and Nevada provide a means to establish structures comparable to those established in Panama. Banks should evaluate whether a review of account relationships with LLCs, PICs, trusts, and other structures created in these jurisdictions may be warranted.
- Fifth, the Panama Papers highlight the reputational risk to banks of engaging with secrecy havens (domestic and international). While the reporting thus far does not appear to allege illegality on the part of the banks, they have been put on notice that their due diligence regimes will be scrutinized in light of the Panama Papers’ revelations.
In sum, the reporting once again highlights the potential legal and reputational risks of offering banking services (including depository and lending services, such as mortgages) to entities such as LLCs, trusts, PICs, PEPs and their close associates, and high net worth customers in the private banking context and the importance of monitoring their transactions and accounts for money laundering, tax reporting (FATCA), and corruption-related purposes.
FATF Updates List of Jurisdictions with AML Deficiencies, FinCEN Issues Related Advisory
On March 21, FinCEN issued advisory bulletin FIN-2016-A002 notifying financial institutions of updates to the Financial Action Task Force’s (FATF) list of jurisdictions containing AML/CFT deficiencies. The FATF updated two documents categorizing certain jurisdictions: (i) the FATF Public Statement, identifying jurisdictions that are subject to the FATF’s call for countermeasures or are subject to Enhanced Due Diligence due to AML/CFT deficiencies; and (ii) the Improving Global AML/CFT Compliance: on-going process, identifying jurisdictions which have developed an action plan with the FATF to address strategic AML/CML deficiencies. Revisions to the FATF Public Statement include the removal of Myanmar (Burma); in turn, Myanmar was added to the Improving Global AML/CFT Compliance: on-going process list. Iran and North Korea remain listed as subject to countermeasures on the FATF Public Statement. Additional jurisdictions currently on the Improving Global AML/CFT Compliance: on-going process list include Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Papua New Guinea, Syria, Uganda, Vanuatu, and Yemen. Algeria, Angola, and Panama were removed from the list. FinCEN reminded U.S. financial institutions that they are subject to a broad range of restrictions on dealing with Iran and North Korea. FinCEN also advised U.S. financial institutions to consider the risks associated with countries on the Improving Global AML/CFT Compliance: on-going process list, and reminded them of their general due diligence obligations, including for foreign correspondent accounts.
OFAC Issues Finding of Violation for Alleged Violations of the Reporting, Procedures, and Penalties Regulations
On March 16, OFAC issued a Finding of Violation to a New York-based international digital payments solutions and technology company for allegedly violating the Reporting, Procedures and Penalties Regulations (RPPR), 31 C.F.R. part 501. According to OFAC, the company failed to report that it held accounts – albeit dormant – in which two Iranian banks on OFAC’s SDN List had an interest. OFAC asserted that, while no company personnel appeared to have knowledge of the conduct that led to the violations, the company had reason to know that it maintained funds associated with the sanctioned Iranian banks because it is “a large and commercially sophisticated company that deals primarily with banks and other financial institutions.” OFAC also noted that the company’s failure to report the accounts resulted in OFAC’s reports to Congress being incomplete, that the failure to record interest on the accounts reduced the value of the blocked accounts, and that the company apparently did not have internal controls sufficient to prevent or identify the violations. On the other hand, OFAC acknowledged that there was no actual knowledge of the violations or a history of similar violations, that the funds did not reach the sanctioned parties, and that the company eventually disclosed the issue and then fully cooperated with the investigation.
Iran Sanctions: Treasury Comments on JCPOA Implementation Day
On January 16, the Department of the Treasury issued a statement regarding Implementation Day under the Joint Comprehensive Plan of Action (JCPOA), the plan reached between the P5+1 (the United States, China, France, Russia, the United Kingdom, and Germany), the European Union, and Iran concerning Iran’s nuclear program. In response to Iran taking the appropriate nuclear-related measures, the United States followed through on lifting nuclear-related “secondary sanctions” on Iran, which included certain financial and banking-related sanctions. To summarize the effect of Implementation Day, OFAC issued guidance and FAQs. As outlined in the FAQs and in addition to lifting the nuclear-related “secondary sanctions,” the United States removed more than 400 individuals and entities from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List). Still, as Treasury Secretary Lew noted, “other than certain limited exceptions provided for in the JCPOA, the U.S. embargo broadly remains in place, meaning that U.S. persons, including U.S. banks, will still be prohibited from virtually all dealings with Iranian entities.”
OFAC Issues Finding of Violation to a Bank for Violations of Iranian Transactions and Sanctions Regulations
On October 21, OFAC issued a Finding of Violation to a Chicago-based bank as the successor of a bank that processed six funds transfers totaling approximately $67,000. According to OFAC, the predecessor bank, between February 3, 2011 and March 10, 2011, processed six funds transfers on behalf of its customer “for the purpose of paying an outstanding balance owed to an Iranian entity located in Iran for the purchase of Iranian-origin carpets,” allegedly resulting in a violation of the Iranian Transactions and Sanctions Regulations (ITSR). The bank allegedly failed to remove its customer “from [its] False Hit List or implement any additional measures to prevent or identify possible violations involving the [customer]” after OFAC removed a general license for the importation of Iranian-origin carpets, which became effective September 29, 2010.
OFAC stated that its determination to issue a Finding of Violation reflects that (i) the predecessor bank may have not been aware of the risks associated with failing to properly review and update a false hit list; (ii) a staff member was aware of the conduct that led to two of the violations, and had “reason to know that the customer may process additional transactions in violation of the ITSR”; and (iii) the bank failed to maintain a compliance program with procedures for updating its internal sanctions list following changes to OFAC-administered sanctions programs. On the other hand, OFAC also considered that (i) no managers or supervisors were aware of the conduct that led to the ITSR violation; (ii) the bank had not previously received a penalty notice or Finding of Violation; and (iii) the bank – pre and post-merger – substantially cooperated with OFAC during the investigation.
Iran Sanctions: Treasury and White House Comment on JCPOA Adoption Day
On October 18, the Department of the Treasury released a statement on reaching the formal “Adoption Day” of the Joint Comprehensive Plan of Action (JCPOA), the plan reached between the P5+1, the European Union, and Iran regarding Iran’s nuclear program. Adoption Day is the day JCPOA participants will begin taking steps necessary to implement their JCPOA commitments. According to Treasury Secretary Lew, October 18 marks an “important milestone” as “Iran begins taking its nuclear-related measures and the United States and [its] partners prepare to lift nuclear-related sanctions in response.” Although this action means that the JCPOA’s effective date is October 18, 2015, no sanctions will be lifted until Implementation Day, which will occur after international inspectors confirm that Iran has met its commitments under the JCPOA. As decided in July and outlined in an OFAC press release, licenses with certain credentials will remain in effect in accordance with their terms until Implementation Day. OFAC also issued FAQs concerning Adoption Day. Commenting on the implications of Adoption Day, the White House likewise issued a Statement that it had directed the heads of all relevant executive departments and agencies of the United States to begin preparations to implement U.S. commitments under the JCPOA.
OFAC Announces Settlement Agreement with Insurance Company
On August 6, OFAC announced a $271,815 settlement with a New York-based insurance company with an overall focus on marine insurance and related lines of business, professional liability insurance, and commercial umbrella and primary and excess casualty businesses. According to OFAC, from May 8, 2008 to April 1, 2011, the company and its London branch office, “issued global protection and indemnity (“P&I”) insurance policies that provided coverage to North Korean-flagged vessels and covered incidents that occurred in or involved Iran, Sudan, or Cuba—some of which led to the payment of claims.” The company’s willingness to engage with OFAC-sanctioned countries resulted in 48 alleged violations of Foreign Assets Control Regulations, Executive Order 13466 of June 26, 2008, North Korea Sanctions Regulations, Iranian Transactions and Sanctions Regulations, Sudanese Sanctions Regulations, and Cuban Asset Control Regulations. OFAC stated that (i) the company did not maintain a formal compliance program at the time it issued the P&I insurance policies; and (ii) the company’s London office personnel “misinterpreted the applicability of OFAC sanctions regulations.” The final settlement amount reflects the fact that managers and supervisors knew or had reason to know that the majority of the insurance policies and claims payments at issue involved OFAC-sanctioned countries; the company is a commercially sophisticated financial institution; and it did not have a formal OFAC compliance program in place at the time the apparent violations occurred. Mitigating factors included the company’s cooperation with OFAC’s investigation; lack of prior enforcement action; and its remedial action plan to implement a sufficient OFAC compliance program.