Sam Finkelstein, Associate at The Volkov Law Group, rejoins us for another post on an OFAC enforcement action.
[co-author: Sam Finkelstein]
Emigrant Bank (“Emigrant”), a U.S.-based financial institution that bills itself as the oldest bank in New York City, is the latest sanctions violator to be swept up in OFAC’s ongoing enforcement push. On September 21, OFAC announced that Emigrant agreed to pay $31,867 to resolve 30 potential violations of the Iran Sanctions Program. The violations all relate to a single CD account (“the account”) that Emigrant maintained for two Iranian residents from 1995 until it closed the account in 2021.
In 1995, Emigrant opened an account for two Iranian residents. The accountholders made no attempt to conceal their Iranian citizenship––they provided a variety of Know Your Customer information, including proof of address and tax forms, all of which stated that they lived in Iran. Emigrant, by mailing documents to the accountholders at their Iranian address, demonstrated its actual knowledge of their residency and location.
During the period beginning in 1995 until 2021, Emigrant renewed the CD account every five years. Emigrant’s lackluster sanctions screening tools failed to flag the account’s Iranian status as problematic for decades. It was not until 2016, when the accountholders requested a wire transfer to another U.S. bank, that Emigrant became aware of potential sanctions issues related to the account. The transfer triggered Emigrant’s sanctions screening software, flagging it for review.
Due to gaps in its sanctions screening software, lackluster sanctions training, and ineffective internal controls, Emigrant’s compliance team approved the wire transfer. After the receiving bank inquired about senders’ the Iranian address, Emigrant reviewed the transaction again, again (incorrectly) concluding––and advising the recipient bank––that the wire transfer was permissible.
Emigrant later changed the account’s country code in its customer database to reflect that the accountholders were Iranian residents. However, Emigrant’s compliance program failed to flag the account for sanctions issues despite the change, so it went unnoticed. Financial institutions should regularly review high-risk accounts to ensure continued OFAC compliance. The frequency with which an account is reviewed should be roughly proportionate to the sanctions risk it poses. To state the obvious, accounts tied to Iran call for the highest level of scrutiny.
In 2019, Emigrant upgraded sanctions screening software, and the new program flagged the account as problematic due to the account holders’ Iranian residency. However, software is only as effective as its operator. Upon review, Emigrant’s compliance team overrode the alert, basing their decision on erroneous guidance from the 2016 wire transfer.
Emigrant finally recognized the account’s Iranian status in 2021, and took commendable steps to remediate its compliance programs’ shortcomings. First, it restricted and eventually closed the account. To avoid future violations, Emigrant expanded its sanctions training program, and undertook a review of any other accounts belonging to customers in sanctioned jurisdictions.
The statutory maximum civil penalty applicable to Emigrant was $9,928,410. The fact that Emigrant settled this matter for a mere $31,867 is testament to the value of voluntary disclosure. OFAC cited Emigrant’s voluntary disclosure of the violations, along with its proactive remediation efforts––restricting and closing the account, seeking out other potentially problematic accounts, and improving its sanctions screening systems––as mitigating factors in determining the settlement amount.