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U.K. subsea services company and subsidiaries to pay $440,000 for Cuban and Iranian sanctions violations
On April 11, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced two settlements totaling more than $440,000 with a U.K. subsea services company and certain subsidiaries that operate in the oil and gas industry. The first settlement, for $227,500, resolves potential civil liability for seven alleged violations of the Cuban Assets Control Regulations (CACR). According to OFAC, two of the company's Malaysian affiliates produced analytical reports and conducted workshops for oil well drilling projects in Cuban territorial waters related to projects managed by companies including Venezuela’s state-owned oil company, which was previously designated by OFAC in January (see InfoBytes coverage here). OFAC considered various aggravating factors—including that the alleged violations constitute an egregious case—and noted that the company/subsidiaries “willfully violated U.S. sanctions laws and regulations when they knowingly dealt with Cuban interests despite prior notification of their unlawfulness.” OFAC also noted that senior managers “deliberately concealed their dealings with Cuba on multiple occasions.” OFAC considered numerous mitigating factors, including the company/subsidiaries’ voluntarily self-disclosure of the apparent violations and remedial efforts taken to avoid similar violations from occurring in the future.
The same day OFAC announced a second settlement, this time for $213,866, which resolves potential civil liability for 13 alleged CACR violations. The settlement also resolves three alleged violations of the Iranian Transactions and Sanctions Regulations (ITSR) by the company’s U.S.-based parent company. According to OFAC, the company issued sanctions compliance guidance to all of its subsidiaries with instructions that transactions with Cuba and Iran (including indirect third parties) were prohibited. However, certain subsidiaries disregarded the guidance and allegedly engaged in transactions within Cuban and Iranian territorial waters. In reaching the settlement amount, OFAC determined, among other things, that (i) the company voluntarily self-disclosed the apparent violations; (ii) the alleged violations constitute a non-egregious case; (iii) the subsidiaries have confirmed the conduct has been terminated; and (iv) remedial efforts have been undertaken to minimize the risk of similar violations from occurring in the future.
OFAC sanctions companies for transporting Venezuelan oil to Cuba
On April 5, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against two non-U.S. companies for their alleged involvement in the transportation of oil from Venezuela to Cuba. According to OFAC, the companies have engaged in a “barter system,” in which Venezuelan oil supplies are exchanged for Cuban assistance in the form of “political advisors, intelligence and military officials, and medical professionals. . . all of whom” prop up “the illegitimate Maduro regime through oil-for-repression schemes as [an] attempt to keep Maduro in power.”
Visit here for continuing InfoBytes coverage of actions related to Venezuela.
London-based financial institution to pay $1.1 billion for U.S. sanctions violations
On April 9, U.S. and U.K regulators announced that a London-based global financial institution would pay $1.1 billion to settle allegations by the DOJ, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the Federal Reserve Board, the New York Department of Financial Services (NYDFS), the Manhattan District Attorney, and the U.K.’s Financial Conduct Authority (FCA) for allegedly violating multiple sanctions programs, including those related to Burma, Cuba, Iran, Sudan, and Syria. According to the OFAC announcement, from June 2009 until May 2014, the institution processed thousands of transactions involving persons or countries subject to sanctions programs administered by OFAC, but the majority of the actions at issue concern Iran-related accounts maintained by the institution’s Dubai branches. OFAC alleged the Dubai branches processed transactions through the institution’s New York branches on behalf of customers that were physically located or ordinarily resident in Iran.
According to the $639 million settlement agreement, OFAC noted, among other things, that the institution “acted with reckless disregard and failed to exercise a minimal degree of caution or care” with respect to the actions at issue. Moreover, OFAC alleged that the institution had actual knowledge or reason to know its compliance program was “inadequate to manage the [the institution]’s risk.” OFAC considered numerous mitigating factors, including that the institution’s substantial cooperation throughout the investigation and its undertaking of remedial efforts to avoid similar violations from occurring in the future.
The $639 million penalty will be deemed satisfied by the institution’s payments to other U.S. regulators, which includes, $240 million forfeiture and $480 million fine to the DOJ, $164 million fine to the Federal Reserve, and $180 million fine to the NYDFS. The institution also settled with the FCA for $133 million. The settlement illustrates the risks to foreign financial institutions associated with compliance lapses when processing transactions through the U.S. financial system.
Micronesian official pleads guilty to corruption-related money laundering conspiracy
On April 3, the DOJ announced that a Micronesian government official pleaded guilty in the District of Hawaii to a money laundering conspiracy “involving bribes made to corruptly secure engineering and project management contracts from the government of the Federated States of Micronesia (FSM), in violation of the” FCPA. The official was arrested in February after a Hawaiian executive pleaded guilty to a related FCPA conspiracy charge the prior month (see previous FCPA Scorecard coverage here).
According to the DOJ, the official "was a government official in the FSM Department of Transportation, Communications and Infrastructure who administered FSM’s aviation programs, including the management of its airports.” The official admitted that, between 2006 and 2016, a Hawaii-based engineering and consulting company “paid bribes to FSM officials, including [the official], to obtain and retain contracts with the FSM government valued at nearly $8 million.” The official’s sentencing is scheduled for July 29.
Federal Reserve seeks comments on capital framework for U.S. subsidiaries of foreign banks
On April 8, the Federal Reserve Board announced a notice of proposed rulemaking and request for comment (NPRM) seeking to modify its regulation of the regulatory capital requirements for U.S. subsidiaries of foreign banking organizations. Chairman Jerome Powell referred to a proposal issued last fall for refining regulations for domestic banking firms based on risk profiles (previously covered by InfoBytes here), and noted that “because the U.S. operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities, and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank.”
The NPRM builds upon the Federal Reserve’s framework for U.S. firms announced last fall, and states that foreign banking organizations with $100 billion or more in U.S. assets would be assigned to one of three categories based on the size of their U.S. operations as well as the following risk-based indicators: “cross-jurisdictional activity, nonbank assets, off-balance sheet exposure, and weighted short-term wholesale funding.” Under the proposal, foreign banking organizations would be classified into the following three categories: (i) Category II: foreign banking organizations with U.S. assets exceeding $700 billion or $75 billion in cross-border activity; (ii) Category III: foreign banking organizations with more than $250 billion in U.S. assets that also exceed certain risk thresholds; and (iii) Category IV: foreign banking organizations with U.S. assets between $100 billion and $250 billion and minimal risk factors. Category I would be reserved for U.S.-based global systemically important banks.
A second proposal issued the same day by the Federal Reserve Board, the FDIC, and the OCC (collectively, the “Agencies”) requests comment on, among other things, whether the Agencies should extend standardized liquidity requirements to foreign banking organizations’ U.S.-based branches and agency networks as well as approaches for doing so.
Comments on both proposals are due June 21.
German medical equipment provider settles FCPA claims for $230 million
On March 29, DOJ publicly released a non-prosecution agreement it had entered into in late February with a Germany-based provider of medical equipment and services in which the company agreed to pay over $230 million to settle claims that it violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. The alleged misconduct, which included various schemes to pay bribes to public and/or government officials in exchange for business opportunities, occurred over the course of at least a decade and spanned 17 or more countries in Africa, Europe, and the Middle East. On the same day, the company also entered into an administrative order with the SEC. The SEC stated that the company had failed to timely address “numerous red flags of corruption in its operations” that were known to the company as far back as the early 2000s, and that it “failed to properly assess and manage its worldwide risks, and devoted insufficient resources to compliance.”
While the company received credit for making a voluntary disclosure to DOJ in April 2012 and for remedial measures undertaken since that time, DOJ stated that the company failed to timely respond to certain of its requests and, at times, provided incomplete responses to those requests. Accordingly, the company did not receive full credit for cooperation and did not qualify for a declination under the FCPA Corporate Enforcement Policy. In its non-prosecution agreement, among other things, the company agreed to: (i) the appointment of an independent compliance monitor for a two-year term, followed by one year of self-reporting, (ii) continuation of its efforts to cooperate with the DOJ’s investigation, and (iii) disgorgement of approximately $147 million to the SEC and payment of approximately $85 million in fines to the U.S. Treasury. The fine amount was calculated with a 40% discount off of the bottom of the United States Sentencing Guidelines fine range based on $141 million in profits from the alleged misconduct.
Notably, the alleged misconduct involved no U.S.-based conduct, individuals, subsidiaries, or third parties. Instead, the individuals alleged to have engaged in misconduct apparently used internet-based email accounts hosted by service providers in the U.S. (and therefore utilized means and instrumentalities of U.S. interstate commerce), and the company’s American Depository Shares trade on the NYSE so the company files periodic reports with the SEC.
Federal agencies propose rule to reduce impact of large bank failures
On April 2, the FDIC, Federal Reserve Board, and the OCC (together, the “Agencies”) released a joint statement announcing a notice of proposed rulemaking (NPR) to limit the “interconnectedness” of large banking organizations and reduce systemic risk resulting from the failure of global systemically important bank holding companies (GSIBs), certain intermediate holding companies, and GSIB foreign banking organizations. Among other measures, the NPR proposes that, to discourage GSIBs and advanced approaches banking organizations (generally firms with total consolidated assets of $250 billion or more or at least $10 billion in on-balance sheet foreign exposure) from purchasing large amounts of unsecured debt issued by GSIBs, the Agencies propose to subject these investments “to deduction from the . . . organization’s own regulatory capital.” This debt, the Agencies note in the statement, is used to recapitalize the GSIB during bankruptcy or resolution as a result of failure, and the proposal is intended to reduce both interconnectedness within the financial system and systemic risk. Comments on the NPR are due 60 days after publication in the Federal Register.
Federal Reserve amends payment system risk policy applicable to foreign banking organizations
On April 1, the Federal Reserve Board published a revised policy statement on payment system risk (PSR policy) in connection with procedures used to determine the “net debit cap and maximum daylight overdraft capacity” of U.S. branches and agencies of foreign banking organizations (FBO). Among other things, the amended PSR policy (i) removes references to the Strength of Support Assessment ranking, citing the ranking is an “inefficient use” of supervisory resources; (ii) removes references to a FBO’s financial holding company status, since that status has limited ability to measure the health of a FBO; and (iii) adopts alternative methods for determining a FBO’s “eligibility for a positive net debit cap, the size of its net debit cap, and its eligibility to request a streamlined procedure to obtain maximum daylight overdraft capacity.” The Board adopted the changes substantially as proposed, following a notice and request for comment period at the end of 2017. The revisions are effective April 1, 2020.
SEC, UK FCA update cooperation agreements
On March 29, the SEC and the United Kingdom (UK) Financial Conduct Authority (FCA) signed two updated Memoranda of Understanding (MOU) to continue their cooperation and information sharing with respect to the “effective and efficient oversight of regulated entities across national borders.” The MOUs will come into force on the date EU legislation ceases to have direct effect in the UK, should the UK withdraw from the EU.
The first MOU is a supervisory arrangement covering regulated entities operating across national borders. The MOU—originally signed in 2006—includes updates to increase the scope of covered firms under the MOU to include firms that carry out derivatives, credit rating, and derivatives trading repository businesses. The update will reflect “the FCA’s assumption of responsibility from the European Securities and Markets authority for overseeing credit rating agencies and trade repositories in the event of the UK’s withdrawal from the EU.”
The second MOU—originally signed in 2013—provides a supervisory cooperation and exchange of information framework related to the supervision of covered entities operating within the alternative investment fund industry. The updates ensure that covered entities including investment advisers, fund managers, and private funds “will be able to continue to operate on a cross-border basis without interruption” in the event of a withdrawal.
OFAC reaches settlement with tool company for alleged Iranian sanctions violations
On March 27, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $1,869,144 settlement with a U.S. tool manufacturer and its China-based subsidiary for 23 alleged violations of the Iranian Transactions and Sanctions Regulations (ITSR). The settlement resolves potential civil liability for the company’s alleged transactions, valued at over $3.2 million, involving the subsidiary’s exporting and attempts to export 23 shipments of power tools and spare parts “with knowledge that such goods were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran.” Because the ITSR generally prohibit non-U.S. subsidiaries of U.S. persons from knowingly engaging in transactions with Iran, this settlement illustrates the importance of implementing OFAC compliance measures at such subsidiaries.
In arriving at the settlement amount, OFAC considered various aggravating factors and characterized the alleged violations as “an egregious case.” While the company voluntarily self-disclosed the alleged violations on behalf of its subsidiary, OFAC stated, among other things, that the company allegedly failed to implement procedures to monitor and audit the subsidiary’s compliance with applicable sanctions policies post-acquisition. Moreover, OFAC claimed that the subsidiary’s senior management continued to export goods to Iran, despite executing written agreements stating they would not engage in such conduct and attending compliance training sessions.
OFAC also considered numerous mitigating factors, including that (i) neither the company nor the subsidiary have received a penalty or finding of a violation in the five years prior to the transactions at issue; (ii) the company immediately implemented “substantive remedial efforts,” including halting all of the subsidiary’s exports and hiring an independent investigator; and (iii) the company cooperated with OFAC’s investigation. OFAC noted that the company has committed to taking corrective actions to minimize the risk of recurring conduct.
Visit here for additional InfoBytes coverage of actions related to Iran.