OFAC Enforcement Update: Settlements Show Value of Internal Controls, Disclosure

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On December 23, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and TD Bank, N.A. (TD) reached a settlement to resolve TD’s violations of the North Korea Sanctions Regulations and the Foreign Narcotics Kingpin Sanctions Regulations.  On January 12, OFAC and Sojitz Hong Kong (Sojitz HK) reached a settlement agreement in connection with Sojitz’s violations of the Iranian Transaction and Sanction Regulations (ITSR).  These two resolutions, reached only a few weeks apart, serve as a reminder of OFAC’s broad remit to administer and enforce U.S. sanctions regulations.

TD Bank Violated North Korea and Narcotics Kingpin Sanctions

The United States maintains comprehensive sanctions on North Korea, and most transactions with the country and nationals of the country, wherever located, are prohibited without a license.  While a license authorizes banks in the United States to conduct certain transactions with the North Korean Mission to the United Nations, that license does not extend to maintaining accounts for employees of the North Korean Mission.

According to OFAC, TD processed 1,479 transactions and maintained nine accounts on behalf of five employees of the North Korean Mission without a license from OFAC.  OFAC noted that TD’s sanctions screening did not pick up individual employees of the government of North Korea.  OFAC also noted that TD employees apparently misclassified North Korean Mission personnel when processing passports by filling in the South Korean country code or leaving the citizenship identification field blank.

 

OFAC also penalized TD for maintaining accounts for a Specially Designated National (SDN) Narcotics Kingpin for four years. (As is the case with North Korea, virtually all transactions with an SDN are prohibited.)

According to OFAC, TD received several sanctions screening alerts for this SDN during the relevant time.  TD apparently disregarded the first four alerts because there was no match on the SDN’s full name, date of birth, and geographic location. The fifth alert, which was generated in February 2020, was accepted, at which point the SDN’s accounts were closed.

TD agreed to settle the matter with OFAC by paying a civil fine of more than $115,000.  OFAC significantly reduced the fine amount in principal part because TD voluntarily disclosed the violations to OFAC then cooperated with the agency in its review of the matter.

Sojitz HK Violated U.S. Sanctions on Iran

The settlement OFAC reached with Sojitz HK, with the company agreeing to pay more than $5.2 million, involved violations of the ITSR when Sojitz HK effected U.S. dollar payments for Iranian-origin high-density polyethylene resin.  Sojitz Corporation, the parent company of Sojitz HK, is based in Japan.

According to OFAC, Sojitz HK ultimately made 60 payments through the U.S. banking system to cover purchases of Iranian-origin resin from a supplier in Thailand.  The payments were made by company employees, notwithstanding that those employees had been instructed that they could not make U.S. dollar payments in connection with any business involving Iran.  According to OFAC, these employees intentionally circumvented the instructions.

Given the number of transactions involved and the amount of money (more than $75 million) in payments made to the Thai supplier, the statutory maximum penalty that could have been imposed against Sojitz HK was over $150 million.  OFAC emphasized that the very significant penalty reduction was the result of several factors, including that the company voluntarily disclosed the violations and cooperated with the agency’s review in the matter.  In addition, OFAC highlighted that the company agreed to enhance its compliance processes.  Moreover, the company terminated the employees involved in the violations.

Importance of Proper Response to Violations, Compliance Enhancements

These matters underscore the importance of implementing appropriate sanctions screening controls, including backup protection. Doing so can help a company identify and prevent a sanctions violation despite missed red flags.

These matters also serve as a reminder of the importance of training personnel on their sanctions obligations and the corresponding company processes to meet those obligations.  This makes violations less likely and – critically – helps protect the company if a violation does occur.  OFAC specifically referenced, as a mitigating factor in the Sojitz HK resolution, that the company had been explicit with personnel about not making U.S. dollar payments for any transaction involving Iran.

Finally, both resolutions demonstrate that making a voluntary disclosure to OFAC can lead to meaningful penalty reductions.  The decision to disclose is an important one and must be made carefully.  Once a disclosure is made, maximum transparency and cooperation with the government are required.  So it is not a decision a company should make lightly.  But the benefits that TD and Sojitz HK received from disclosing are clear.

* Thanks to law clerk Ustina Ibrahim for her work on this article.

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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