$1.1 Billion and Counting – The New Era of OFAC Enforcement

by BakerHostetler
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On February 13, 2014, BNP Paribas ("BNP"), France's largest bank, announced in its fourth quarter results that it will soon be joining the growing community of banking institutions that, within the past five years, have been sanctioned for violations of the United States Department of Treasury's Office of Foreign Assets Control ("OFAC") regulations. OFAC is tasked with administering and enforcing economic and trade sanctions that are designed to protect U.S. foreign policy and national security. The Office prohibits trading with entities that are targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. All persons and entities within the U.S., including banks, bank holding companies, and their foreign branches, must comply with OFAC's regulations or face potentially sizable civil and criminal penalties.

BNP stated that its internal review had uncovered a "significant volume of transactions that could be considered impermissible under U.S. laws and regulations including, in particular, those of the Office of Foreign Assets Control."[1] As a result, the bank reported it has set aside a monumental $1.1 billion in anticipation of a settlement with U.S. regulatory authorities. BNP has presented its findings to the relevant U.S. authorities and the parties have entered into discussions. The transactions subject to the investigation occurred from 2002 through 2009 and, while a spokeswoman for BNP declined to identify the offending countries, media outlets have reported that they are Iran, Cuba, and Sudan. BNP is now facing investigations by six government agencies: the Justice Department, the United States Attorney's Office in Manhattan, the Federal Reserve, the Treasury Department, New York State's Department of Financial Services, and the Manhattan District Attorney.

Although BNP has reserved $1.1 billion for settlement, the amount assessed against the bank could be significantly larger. BNP explained that since there have not been any discussions with authorities regarding penalties, "considerable uncertainty" remains "as to the actual amount of fines or penalties that the U.S. authorities could impose."[2] The final penalties will be determined by the regulatory agencies once they complete their analysis of all offending transactions and decide the appropriate amount of restitution. Because banks often set aside less money than they will eventually need for settlement, it is quite possible that BNP's future settlement with OFAC could be record-shattering.

A NEW ERA OF OFAC ENFORCEMENT

OFAC fines have skyrocketed since 2009, when Congress effected an increase in the statutory maximum per violation from a cap of $11,000 to $250,000 per violation or twice the value of the underlying transaction. When assessing fines, OFAC looks to a myriad of factors, including the awareness of senior management, the size and sophistication of the entity, and reporting procedures. The more sophisticated the entity being investigated, and the higher the level of knowledge of the infractions within the entity, the heftier the fines. However, if an entity self-reports a violation, fines can be slashed in half.

Congress's amendments to OFAC regulations have allowed regulators to rake in an unprecedented amount of fines. In 2008, before enhanced penalties became effective, total penalties amassed were approximately $3.5 million for 108 settled matters. Just one year later OFAC amassed an amount of over $772 million for just 27 matters -- increasing penalties per matter by nearly one-thousand-fold. Recent years have proven that this jump was no anomaly, but rather the beginning of a new era of heighted OFAC enforcement and penalty assessment. 2012 was the biggest year thus far, with OFAC windfalls of over $1.1 billion for only 16 matters. While 2013 penalties were significantly less, totaling $137 million for 26 matters, with BNP already foreshadowing a large settlement, 2014 could quite possibly exceed all prior years.

JOINING ITS PEERS

BNP is not the first banking entity to be snared by the long arm of OFAC. Included in these rising totals are a number of banks, all of whom have paid exorbitant fees to settle alleged OFAC violations. Most recently, in December of 2013, the Royal Bank of Scotland ("RBS") paid $33 million to settle OFAC violations arising out of transactions made in Iran, Sudan, Myanmar, and Cuba. Because RBS self-reported these violations, it was able to avoid paying the statutory maximum of over $132 million. 2013 also saw the settlement of an investigation of Italian bank Intensa Sanpaulo. In June 2013, Intensa Sanpaulo settled claims of processing wire transfers involving Cuba, Sudan, and Iran for almost $3 million. Société Générale SA, France's second largest bank, announced in its 2013 annual report that it had begun discussions with OFAC and commenced an internal audit as well.

As mentioned, 2012 was the highest grossing year for OFAC violations, in large part due to several massive settlements by European banks. In December 2012, HSBC famously paid a global $1.9 billion fine, $375 million of which went to OFAC to settle charges of conducting financial transactions for customers in Cuba, Iran, Libya, Myanmar, and Sudan. 2012 also had the highest ever settlement for OFAC violations, with ING Bank paying a record $619 million to settle claims arising out of transactions involving Cuba, Myanmar, Sudan, Libya, and Iran. Rounding out the class of international banks paying millions to OFAC in 2012 were Standard Chartered Bank and Bank of Tokyo-Mitsubishi UFJ, Ltd, which paid settlements of $132 million and $8.5 million, respectively.

Other major banks have also been subjected to substantial fines by OFAC. In 2011, JP Morgan Chase Bank settled with OFAC for over $88 million for engaging in banned transactions with Liberia, Iran, Sudan, and Cuba. Credit Suisse settled with OFAC and New York State for $536 million, which was split equally between the agencies, in late 2009. The British banks of Lloyds TSB Bank ("Lloyds") and Barclays Bank PLC ("Barclays") have also been hit with fines. Lloyds paid $217 million to OFAC in 2009, and Barclays settled with OFAC in 2010 for $176 million.

SIGNIFICANCE

While the details of BNP's violations remain to be disclosed and a fine has yet to be assessed, BNP's actions are indicative of a global movement toward international and national banking institutions uncovering and disclosing past OFAC regulatory violations to U.S. regulators. Companies should assess their own risks relating to compliance with OFAC and implement monitoring procedures commensurate with their risk profiles. Accurately assessing, identifying, and documenting a company's overall risk of investigation by OFAC will communicate to regulators both that the company has a clear understanding of OFAC regulations and that it can properly appropriate compliance funds to prevent future violations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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