OFAC Sanctions: No Entity Too Small or Too Far for Enforcement

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

  • Canadian bank pays penalties for U.S. dollar transactions involving Cuba and Iran
  • Bank receives Finding of Violation – but no penalty – for violations by European subsidiaries
  • Disclosure and cooperation with OFAC mitigated penalties

Earlier this month, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a $516,000 settlement with a large Canadian bank for allegedly violating U.S. sanctions against Iran and Cuba 167 times. OFAC also issued a separate finding of 3,491 additional violations by two of the bank’s European subsidiaries – an investment services company and another small bank.  Yet OFAC imposed no penalty for the subsidiaries’ alleged violations.

These resolutions remind us, yet again, that OFAC’s enforcement reaches violations of varying proportions – even beyond the U.S. border.  The resolutions also highlight the weight that OFAC accords self-disclosure and cooperation in responding to violations.

According to OFAC, the Canadian bank was involved in several trade finance transactions in violation of the Cuban Assets Control Regulations and the Iranian Transactions and Sanctions Regulations. These violations dated back to approximately 2003 and lasted through 2011. The most prevalent violation involved issuing import-export letters of credit without screening for a connection to sanctioned countries or entities. The bank maintained accounts with one Canadian company that was owned by a Cuban entity, and another Canadian company that transported oil- and gas-related equipment to the Middle East; that company, in turn, was a sales agent for an Iranian entity designated on OFAC’s List of Specially Designated National and Blocked Persons. The bank also allegedly maintained accounts on behalf of 62 customers who were Cuban nationals residing in Canada.

By OFAC’s calculations, the unauthorized transactions through Iran and Cuba totaled more than $2 million. Those transactions involved non-U.S. bank personnel who – according to OFAC – knew or should have known of the customers’ connections to sanctioned nations and entities.  That personnel were or should have been aware of the violations was an aggravating factor and largely the result of ineffective compliance policies and procedures. According to OFAC, the bank, a large sophisticated financial institution with a global presence, should have implemented more effective compliance controls.

The settlement amount was mitigated by the relatively non-egregious nature of the violations.  For one thing, OFAC found no indication that any manager or supervisor knew that the accounts were linked to prohibited customers.  Moreover, the Cuba-connected customers were eligible for specific licenses from OFAC and were eventually unblocked by a January 2011 general license. OFAC also noted the bank’s substantial cooperation during the investigation, including its voluntarily self-disclosure, provision of detailed and well-organized information in response to OFAC’s requests, and signing and extension of a tolling agreement. The other mitigating factors included those common in other settlements – including a clear record in the five years prior to the investigation and a genuine effort to remediate.

The separate Finding of Violations for the violations by the bank’s subsidiaries highlights the long arm of sanctions enforcement.  The investment services company primarily conducts its business within Luxembourg.  It used the smaller bank as a broker-dealer for executing securities transactions with its customers.

In its annual Anti-Money Laundering Risk Assessment, the Canadian bank discovered that the small European bank had no sanctions compliance program in place and that, together, the investment services company and smaller bank processed 3,491 transactions with persons residing or located in Iran or Cuba.  These transactions totaled $92,868,862 between 2008 and 2013.

Yet, notwithstanding the staggering number and enormous dollar value of the violations, no penalty was imposed against the subsidiaries. OFAC explained that those violations were not the result of intentional misconduct but rather inadequate compliance and a lack of understanding about the scope of U.S. sanctions jurisdiction.  OFAC also emphasized that the smaller bank, like its parent, took remedial measures and improved its compliance system.

In any event, the penalties imposed (and not imposed) by OFAC demonstrate that, regardless of size and location, entities must comply with U.S. sanctions regulations when transacting with or in the United States.  Similarly, this settlement demonstrates that OFAC expects greater accountability from larger businesses that serve as middle men for non-U.S. entities.  Large global entities are expected to understand the complexities of U.S. sanctions laws and to have in place the compliance infrastructure to prevent, detect, and – when deemed appropriate – self-report violations.

We would like to thank Lidiya Kurin, a Bass, Berry & Sims law clerk based in our Washington, D.C. office, for her assistance in drafting this alert.

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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