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OFAC Issues Burundi Sanctions Regulations
On April 14, OFAC issued the Burundi Sanctions Regulations, 31 CFR part 554 to implement the November 22, 2015 Executive Order 13712, “Blocking the Property of Certain persons Contributing to the Situation in Burundi.” OFAC issued the regulations in abbreviated form to provide immediate guidance to the public. The regulations provide limited definitional and interpretive guidance, and contain a number of licenses permitting U.S. persons to engage in activities otherwise prohibited by Executive Order 13712, including, among others, providing legal services and emergency medical services to designated persons. Persons designated pursuant to Executive Order 13712, i.e., those whose property and interests in property are blocked, are published in the Federal Register and incorporated into OFAC’s List of Specially Designated Nationals and Blocked Persons with the identifier ‘[BURUNDI].’” OFAC intends to issue a more comprehensive set of regulations in the future, which may include additional interpretive and definitional guidance, as well as additional general licenses and statements of licensing policy.
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.
President Expands North Korean Sanctions
On March 16, the President issued an Executive Order broadening sanctions in response to North Korea’s continuing pursuit of its nuclear and ballistic missile programs. The order blocks the Government of North Korea and the Workers’ Party of Korea; prohibits the exportation of goods, technology and services (including financial services) to North Korea from the United States; prohibits new investment in North Korea by U.S. persons; and establishes nine new criteria for designation as a blocked person. One provision authorizes the Secretary of the Treasury to identify sectors of the North Korean economy to target for asset blocking sanctions. Under this authority, Treasury Secretary Jacob J. Lew determined that persons in the transportation, mining, energy, or financial services sectors of North Korea can be targeted.
Simultaneously, OFAC designated 17 officials or organizations of the Government of North Korea as SDNs, meaning that all of these persons’ property or interests in property in the United States or the possession or control of a U.S. person are blocked. OFAC also identified 20 vessels as blocked.
Finally, OFAC issued nine general licenses permitting certain activities involving North Korea that would otherwise be prohibited by the new Executive Order. These general licenses authorize, among other activities, noncommercial, personal remittances on behalf of individuals normally resident in North Korea; third-country consular funds transfers and transactions related to intellectual property; and support of non-governmental organizations and telecommunications and mail.
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.
OFAC Announces Settlement with London-Based Financial Institution for Alleged Violations of the Zimbabwe Sanctions Regulations
On February 8, OFAC settled with a London-based financial institution for alleged violations of the Zimbabwe Sanctions Regulations, 31 C.F.R. part 541 (ZSR). The financial institution agreed to pay $2,485,890 for processing 159 transactions to or through financial institutions located in the United States for or on behalf of corporate customers of the financial institution’s Zimbabwean subsidiary that were owned, directly or indirectly, 50% or more by a customer identified on OFAC’s SDN List. According to OFAC, the financial institution relied on the subsidiary’s electronic customer records and documentation to perform cross-border transactions screenings and sanctions-related customer screening. Due to deficiencies in the subsidiary’s electronic customer system and its “Know Your Customer” procedures, neither the financial institution nor its subsidiary detected certain customers as blocked persons – under Executive Order 13469 of July 25, 2008 – on the SDN List and “continued to process [U.S. Dollar] transactions for or on their behalf to or through the United States in apparent violation of the ZSR.” OFAC determined that the company did not voluntarily self-disclose the apparent violations, and that the apparent violations constitute a non-egregious case. In determining the settlement amount, OFAC found the following to be mitigating factors: (i) the financial institution had not received a penalty notice or Finding of Violation in five years preceding the earliest date of the transactions giving rise to the apparent violations; (ii) the financial institution took remedial action in response to the apparent violations; and (iii) the financial institution substantially cooperated with OFAC’s investigation. In addition, OFAC “considered the fact that the prohibited entities were not publicly identified or designated and included on the SDN List at the time that Barclays processed transactions for or on their behalf.”
OFAC Issues Finding of Violation for Alleged Violations of Sudanese Sanctions Regulations
On February 4, OFAC announced that a subsidiary of a New Jersey-based manufacturer violated the Sudanese Sanctions Regulations, for a period of 7 months in 2010, by facilitating the exportation of goods to Sudan by coordinating and supervising shipments of goods from an Egyptian branch of the company to Khartoum, Sudan. Pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, OFAC issued a Finding of Violation to the subsidiary based in part on the following “aggravating” factors: (i) acting with reckless disregard for U.S. sanctions requirements by making exports to Sudan when it knew it may be subject to restrictions under U.S. sanctions; (ii) failing to properly take into consideration the implications of OFAC regulations – even though it is part of a corporation with experience in international trade – when it restructured its consumer business and placed a U.S. company in charge of sales to Sudan; and (iii) failing to include in its compliance program training on OFAC regulations for its General Manager, who was responsible for sales to Sudan. OFAC also determined that the subsidiary’s General Manager for Emerging Markets in the Middle East and North Africa was not only aware of but also involved in conduct giving rise to the violations. OFAC issued a Finding of Violation in lieu of a civil money penalty, after considering various mitigating factors, including the subsidiary’s effort to take remedial action, such as implementing additional compliance training and conducting an internal investigation of the violations, the absence of a prior OFAC sanctions history and its cooperation with OFAC’s investigation.
OFAC Issues Amendments to Cuba Sanctions Regulations
On January 26, OFAC announced amendments to the Cuban Assets Control Regulations (CACR) to further implement policy changes announced by the Obama Administration on December 17, 2014. The regulatory changes will, among other things, “remove existing restrictions on payment and financing terms for authorized exports and reexports to Cuba of items other than agricultural items and commodities, and establish a case-by-case licensing policy for exports and reexports of items to meet the needs of the Cuban people, including those made to Cuban state-owned enterprises.” Significantly, under the amendments, U.S. depository institutions will be authorized to provide financing for authorized exports and reexports, including issuing a letter of credit. Prior to the amendments, cash-in-advance or third-country financing were the only financing options available for authorized exports.
OFAC issued new FAQs to address the amended CACR, which were published in the Federal Register on January 27, 2016 and are effective immediately.
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.”
Federal Reserve and New York DFS Announce $258 Million Penalty Against Global Bank
On November 4, the Federal Reserve and the New York DFS announced a combined $258 million penalty against a global bank for “violations in connection with transactions on behalf of countries and entities subject to U.S. sanctions.” According to the Fed’s cease and desist order, the bank failed to implement adequate risk management and compliance policies and procedures to “ensure that activities conducted at offices outside the United States complied with applicable OFAC Regulations and were timely reported in response to inquiries by the Federal Reserve Bank of New York.” Specifically, the Fed alleged that, from November 2001 to January 2006, foreign offices of the bank processed funds transfers with parties subject to OFAC Regulations through the bank’s New York-based subsidiary and other unaffiliated U.S. financial institutions without having the information necessary to determine that the transactions were consistent with U.S. law. The Fed’s order requires the bank to develop a compliance program that establishes (i) policies and procedures to ensure compliance with applicable OFAC regulations; (ii) an OFAC compliance reporting system; and (iii) requirements for employee training in OFAC-related issues. Under the terms of the DFS consent order, the bank agreed to hire an independent monitor to conduct a comprehensive review of its BSA/AML and OFAC sanctions compliance program, policies, and procedures.
Multiple Agencies Take Action Against Paris-Based Investment Bank for Sanctions Violations
On October 20, the DOJ, OFAC, the NYDFS, the Manhattan District Attorney’s Office, and the Federal Reserve simultaneously announced that a Paris-based investment bank would pay a total of more than $787 million to settle multiple alleged violations of U.S. sanctions regulations. The OFAC settlement resolves allegations that the investment bank and certain predecessor banks, between August 6, 2003 and September 16, 2008, processed 4,055 transactions – for a total of approximately $337,043,846 – to or through U.S. financial institutions that involved countries and/or persons subject to the sanctions regulations administered by OFAC. The investment bank settled with OFAC for more than $329,500,000, an amount that reflects the agency’s consideration of the following aggravating factors: (i) the investment bank had indications that its actions had the potential to constitute violations of the U.S. law before the earliest date of the apparent violations; (ii) several managers of the investment bank were aware of the conduct that led to the violations; (iii) the investment bank’s conduct resulted in significant harm to various sanctions programs OFAC oversees and their associated policy objectives; (iv) the investment bank’s size and sophistication, along with its global presence; and (v) the investment bank’s failure to maintain proper controls to prevent the violations from occurring and otherwise maintain an adequate compliance program.
In addition to OFAC’s settlement, parallel actions against the bank resulted in the investment bank agreeing to pay (i) $385 million to the NYDFS; (ii) $90.3 million to the Federal Reserve; (iii) $156 million to the Manhattan District Attorney’s Office; and (iv) $156 million to the U.S. Attorney’s Office for the District of Columbia.