Tag: OFAC

New Lists to Check for Bad Guys

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If you conduct business overseas or have foreign investors in your funds, you are checking the various block persons lists to ensure you’re not working with bad guys. (You are checking, right.) The Office of Foreign Assets Control (“OFAC”), of the U.S. Department of the Treasury, has created two new lists: the Foreign Sanctions Evaders List and the Blocking Property of Additional Persons Contributing to the Situation in Ukraine.

Foreign Sanctions Evaders List

The FSE List implements Executive Order 13608 by identifying non-U.S. persons and entities that have engaged in conduct evading U.S. economic sanctions with respect to Iran or Syria.  The FSE-listed individuals or entities are not necessarily located in Iran or Syria.

You are generally prohibited from all transactions or dealings, direct or indirect, involving persons or entities identified on the FSE List related to any goods, services, or technology (i) in or intended for the United States, or (ii) provided by or to U.S. persons, wherever located.  However, unlike the OFAC Specially Designated Nationals List, the new FSE List does not require blocking of property and reporting of transactions with FSE-listed entities.

OFAC has elected to maintain a separate FSE List rather than include the FSE entries on the Specially Designated Nationals List.  That means you need to screen against both lists. Most likely, you are using software or a third-party service provider, so check to make sure the FSE List was added to the screening protocol.

Blocking Property of Additional Persons Contributing to the Situation in Ukraine

By Executive Order on March 20, 2014, President Obama put in place new restrictions on companies and individuals that operates in sectors of the Russian Economy that would support the Russian Federation’s annexation of Crimea. It’s an expansion of 13660 and 13661.

So far, the orders have brought sixteen Russian government officials, members of the Russian leadership’s inner circle, and a Russian bank into the sanctions regime. Bank Rossiya (ОАО АБ РОССИЯ) is the personal bank for senior officials of the Russian Federation.

OFAC has added the blocked persons to the Specially Designated Nationals List. I received a notice that my vendor has already included the names in its database.

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Image of villain is a caricature by J.J. McCullough
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OFAC and Private Funds

An SEC-registered investment adviser entered into a settlement agreement with the U.S. Treasury Department’s Office of Foreign Assets Control for allegedly failing to maintain a compliance program. The problem was triggered when the adviser’s foreign affiliate caused one of its clients to invest in a Cayman Islands fund that appeared on OFAC’s list of Specially Designated Nationals. Genesis Asset Managers, LLP agreed to a $112,500 fine for an apparent violation of the Iranian Transactions Regulations (31 C.F.R. part 560) that occurred in 2007.

OFAC claimed that Genesis did not maintain an OFAC compliance program at the time the investment was made. Of course, Genesis was not required to do so.

These were the aggravating factors in this case:

  • Genesis failed to exercise a minimal degree of caution or care in the conduct that led to the apparent violation
  • Officers of Genesis were aware of the conduct giving rise to the apparent violation
  • Substantial economic benefit was conferred to Iran
  • Genesis did not have an OFAC compliance program in place at the time of the apparent violation

These were the mitigating factors:

  • Genesis has not received a penalty notice or Finding of Violation from OFAC for substantially similar violations
  • Genesis substantially cooperated with OFAC’s investigation
  • Genesis voluntarily self-disclosed the apparent violation
  • Genesis took appropriate remedial action
  • Genesis may not have fully understood its OFAC obligations under U.S. law.

I find the last one strange. Every firm needs to comply with the OFAC regulations that prohibit transactions with parties on OFAC’s list of Specially Designated Nationals. Genesis is based on Britain so maybe the firm was bit confused about the extra-territorial reach of US law across the banking and investment systems.

Advisers should adopt risk-based procedures to ensure compliance with OFAC regulations. Most advisers and fund managers are not subject to a formal regulatory requirement to adopt written AML procedures or know-your-customer programs. That does not mean that such programs are bad ideas.

An adviser that can effectively demonstrate a reasonable OFAC/AML compliance program may be able to avoid heightened scrutiny from regulators. And investors are increasingly expecting their fund managers to have AML programs in place. If a violation does occur, the existence of a formal program can help mitigate the damage. In its enforcement guidelines, OFAC has stated that it may consider the “existence, nature and adequacy of a [firm’s] risk-based OFAC compliance program” in determining whether to bring an enforcement action and the amount of any penalty imposed.

It’s fairly easy to license a system and check your investors and business partners against the OFAC list and other sanctions lists.

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Anti-Money Laundering Program and Procedures

The Foreign Corrupt Practices Act has taken center stage in the headlines for international finance problems. But last week the regulators let us know that the PATRIOT Act has not gone away. ING Bank agreed to forfeit $619 million after admitting that it covered up billions of dollars in transfers that violated U.S. sanctions on Iran and Cuba.

That was a record settlement under the OFAC regime. The settlement resolves OFAC’s investigation into ING Bank’s intentional manipulation of information about U.S.-sanctioned parties in more than 20,000 financial and trade transactions routed through third-party banks located in the United States between 2002 and 2007.

From the Settlement Agreement it looks like ING was trying to isolate some banking relationships with Cuba. It tried to isolate money originating from Cuba from the rest of the international banking world, at least so far as that money is banned from the international banking world. According to the Settlement Agreement, the bank and its employees went too far and altered transaction information to hide the evidence that money was coming from Cuba.

ING also deleted origination information for transactions involving Iranian money. The problem was that some of the transactions used US dollars, which meant the transactions were cleared through New York and subject to US jurisdiction.

Private fund managers are subject to OFAC restrictions and are otherwise prohibited from dealing with “bad guys.” FINRA has provided a template for small brokerage firms: Anti-Money Laundering (AML) Template for Small Firms.

The world of private equity is probably not very attractive for money laundering. The investments are long term and require the contribution of cash over many years. The investment is illiquid and will take years to be returned. Most money laundering transactions look for a more liquid transfer of cash. Since their illegal funds are isolated, they are already illiquid.

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Amsterdam Zuidoost ING-Bank is by Pieter Delicaat

Click to access 06122012_ing_agreement.pdf

Export Control Limitations

I don’t spend much time dealing with export regulations. It’s kind of hard to ship a commercial office building oversees. The Bureau of Industry and Security (BIS) is responsible for implementing and enforcing the Export Administration Regulations (EAR), which regulate the export and reexport of most commercial items. Other agencies regulate more specialized exports.

If you are shipping stuff oversees, you need to determine if you need a license. There four questions you need to ask:

  • What are you exporting?
  • Where are you exporting?
  • Who will receive your item?
  • What will your item be used for?

I’m focused on the “who will receive your item list, because there are long lists of individuals and organizations are prohibited from receiving U.S. exports. These are the general lists:

BIS Entity List – EAR Part 744, Supplement 4 – A list of organizations identified by BIS as engaging in activities related to the proliferation of weapons of mass destruction. http://www.access.gpo.gov/bis/ear/pdf/744spir.pdf

Treasury Department Specially Designated Nationals and Blocked Persons List – EAR Part 764, Supplement 3 – A list maintained by the Department of Treasury’s Office of Foreign Assets Control comprising individuals and organizations deemed to represent restricted countries or known to be involved in terrorism and narcotics trafficking. http://www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf

The Unverified List is composed of firms for which BIS was unable to complete an end-use check. Firms on the unverified list present a “red flag” that exporters have a duty to inquire about before making an export to them. http://www.bis.doc.gov/enforcement/unverifiedlist/unverified_parties.html

Denied Persons – You may not participate in an export or reexport transaction subject to the EAR with a person whose export privileges have been denied by the BIS. http://www.bis.doc.gov/dpl/thedeniallist.asp

If you’re dealing with defense articles and defense services, you will need to look at the Department of State’s Directorate of Defense and Trade Controls.  They have limitations imposed by country: County Policies and Embargoes.

If you’re dealing with nuclear material, then you need to avoid the embargoed countries listed in 10 CFR 110.28 and the restricted destinations in 10 CFR 110.29.

There are a bunch of other programs, but they seem mostly focused on specialized materials and are do not have specific lists of blocked parties.

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Credit Suisse Settles OFAC Charges for $536 million

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The Credit Suisse Group has reached a settlement with U.S. authorities related to U.S. dollar payments involving parties subject to U.S. sanctions. The $536 million global settlement with Credit Suisse represents by far the largest sanctions settlement in the history of US Treasury’s Office of Foreign Assets Control.

The settlement arises out of Credit Suisse’s processing of thousands of transactions over a 20 year period that concealed the involvement of sanctioned parties. Credit Suisse approached OFAC in early April 2006 about an internal investigation it was conducting related to U.S. securities transactions executed on behalf of an entity subject to U.S. sanctions. In early 2007, after the New York County District Attorney’s Office began looking into several suspicious wire transfers, Credit Suisse also informed OFAC of a separate internal investigation related to its activities as a U.S. dollar correspondent for payments involving Iran, Sudan, Burma, Cuba, North Korea.

The settlement agreement lays out the decades long history of bad behavior at Credit Suisse.

“Credit Suisse in Zurich had a standard procedure of structuring payments to avoid disclosing the sanctions nexus of transactions passed through the United States, deleting or omitting certain information when transactions were to be processed through the United States, and providing incorrect information in wire transfer instructions executed through the United States on behalf of U.S. sanctioned individuals and entities. This standard procedure was embodied in internal directives, memoranda, and e-mails involving, among others, a Credit Suisse Bank Payments sector head, Credit Suisse’s Treasury and Trade Finance departments, the head of Credit Suisse’s Iran desk, as well as in e-mails between Credit Suisse and its Iranian bank clients.

…

Specifically, from on or about August 19,2003, to on or about November 1,2006, Credit Suisse processed 4,775 electronic funds transfers, in the aggregate amount of USD 480,072,032.00, through financial institutions located in the United States to the benefit of the Government of Iran and/or persons in Iran, including various Iranian financial institutions, in apparent violation of the prohibition against the “exportation, … directly or indirectly, from the United States, … of any … services to Iran or the Government of Iran,” 31 C.F.R. § 560.204.”

Credit Suisse is making the $536 million payment pursuant to a settlement agreement with OFAC and deferred prosecution agreements with the New York Country District Attorney’s Office and the United States Department Justice.

I would expect that a shareholder class action suit will be filed shortly as well. We have seen these shareholder suits result from FCPA settlements.

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Amendment to the Global Terrorism Sanctions Regulations

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The Office of Foreign Assets Control (OFAC) amended the Global Terrorism Sanctions Regulations, 31 C.F.R. part 594 to define the term “financial, material, or technological support,” as used in sanction regulations.

Section 594.201(a)(4)(i) of the regulations implements section 1(d)(i) of Executive Order 13224, as amended, by blocking the U.S. property of persons who assist in, sponsor, or provide financial, material, or technological support for acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S.

New section 594.317, in subpart C of the GTSR, defines the term “financial, material, or technological support” to mean any property, tangible or intangible, and includes a list of specific examples:

“The term financial, material, or technological support, as used in § 594.201(a)(4)(i) of this part, means any property, tangible or intangible, including but not limited to currency, financial instruments, securities, or any other transmission of value; weapons or related materiel; chemical or biological agents; explosives; false documentation or identification; communications equipment; computers; electronic or other devices or equipment; technologies; lodging; safe houses; facilities; vehicles or other means of transportation; or goods.

‘‘Technologies’’ as used in this definition means specific information necessary for the development, production, or use of a product, including related technical data such as blueprints, plans, diagrams, models, formulae, tables, engineering designs and specifications, manuals, or other recorded instructions.”

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Real Estate and OFAC Compliance

650 fifth avene

The tale of 650 Fifth Avenue is one that should be closely watched by compliance professionals dealing with real estate. Last year, the Department of Justice filed a forfeiture proceeding against a 40% interest in the property held by the Assa Corporation. They recently filed a forfeiture proceeding against the other 60% held by the Alavi Foundation.

The Amended Complaint alleges that the Alavi Foundation has been providing numerous services to the Iranian Government and transferring funds from 650 Fifth Avenue Company to Bank Melli, a bank wholly owned and controlled by the Government of Iran. The Amended Complaint alleges that the properties are forfeitable as the proceeds of violations of the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., together with Executive Orders and United States Department of Treasury regulations, and as property involved in and the proceeds of money laundering offenses.

Now the tenants are in the position of having been making rent payments to the Iranian government. This may not result in any criminal or civil sanctions, but the names of those tenants are being dragged through the muck. The same is true for the property management company.

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OFAC has Released its Economic Sanctions Enforcement Guidelines

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The final Office of Foreign Assets Control. This rule sets forth the Enforcement Guidelines that OFAC will follow in determining an appropriate enforcement response to apparent violations of the U.S. economic sanctions programs that OFAC enforces.

The final rule will appear as an Appendix to the Reporting, Procedures and Penalties Regulations, 31 C.F.R. Part 501.

These are the new General Factors that OFAC will consider in determining the appropriate administrative response:

  • Willful or Reckless Violation of Law
    • Willfulness
    • Recklessness
    • Concealment
    • Pattern of Conduct
    • Prior Notice
    • Management Involvement
  • Awareness of Conduct
    • Actual Knowledge
    • Reason to Know
    • Management involvement
  • Harm to Sanctions Program Objectives
    • Economic or Other Benefit to the Sanctioned Individual, Entity, or Country
    • Implications for U.S. Policy
    • License Eligibility
    • Humanitarian activity
  • Individual Characteristics
    • Commercial Sophistication
    • Size of Operations and Financial Condition
    • Volume of Transactions
    • Sanctions History
  • Compliance Program
  • Remedial Response
  • Cooperation with OFAC
  • Timing of apparent violation in relation to imposition of sanctions
  • Other enforcement action
  • Future Compliance/Deterrence Effect
  • Other relevant factors on a case-by-case basis

The Guidelines are the final rule and replace the Guidelines previously promulgated as an interim final rule with request for comments on September 8, 2008.

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NBA and OFAC

nba

It is unusual to see a story where the National Basketball Association intersect with the U.S. Treasury’s Office of Foreign Assets Control. But that is the lot in life for the 7-foot-2 Hamed Haddadi, a back up center for the Memphis Grizzlies.

Since Mr. Haddadi is from Iran, he is apparently subject to the decades old trade embargo. As a result of Iran’s support for international terrorism and its aggressive actions against non-belligerent shipping in the Persian Gulf, President Reagan, on October 29, 1987, issued Executive Order 12613 imposing a new import embargo on Iranian-origin goods and services. Section 505 of the International Security and Development Cooperation Act of 1985 was utilized as the statutory authority for the embargo which gave rise to the Iranian Transactions Regulations, Title 31, Part 560 of the U.S. Code of Federal Regulations.

International trade is not my area of expertise, but I assume that Mr. Haddadi fell into the category of “goods or services.”

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OFAC: Are You In Compliance?

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ATTUS Technologies was kind enough to host a webinar on OFAC compliance. Bradley Allen, CAMS, gave the presentation and these are my notes.

The mission of Office of Foreign Assets Control is to administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against selected targets. It really came into the forefront as a result of the Post 9/11 policies. OFAC is not just about terrorists and terrorism countries, but also narcotics traffickers and drug kingpins.

Bradley led us through the history of OFAC

  • Secretary Gallatin – Embargo Act of 1807
  • Civil War “Trading with the Enemy Act” (TWEA)
  • WW I “Trading with the Enemy Act of 1917”
  • WW II Office of Foreign Funds Control (FFC)
    • German Invasion of Norway 1940
    • FFC Regulations – Economic Warfare
  • FFC becomes OFAC – December 1950
    • TWEA applied to North Korea & China
  • TWEA applied to Cuba – 1963
  • IEEPA – Peacetime Sanctions – 1977

The key piece is the Specially Designated Nationals list that is gathered by several government agencies with a thorough review process before getting on the list. (It also makes it hard to get off the list.)

The enforcement options can range from no action, issuing a warning letter, a revocation of an export license, civil penalties and even criminal prosecution. There is currently a $250,000 minimum penalty or 2x the value of transaction, whichever is greater. There have been very few criminal prosecutions. The new enforcement guidelines are under IEEPA Enhancement Act October 16, 2007 (P.L. 110-96, 121 Stat 1011) The penalty depends on whether the conduct was egregious and whether you voluntarily disclosed the violation.

There are various pieces of authority for the OFAC lists and enforcement:

  • Trading With the Enemy Act (TWEA), P.L. 65- 91, 40 Stat. 411 (Oct. 6, 1917)
  • International Emergency Economic Powers Act (IEEPA), P.L. 95-223, 91 Stat. (Dec. 28, 1977)
  • Executive Order 13224
  • Various other statutes

Chiquita was fined $25 million by OFAC for paying a Columbian terrorist group for protection. Farq had threatened to kill the Chiquita workers.

Lloyds TSB was fined $350 million for doing business in Iran. Even though they were based in London, they routed wire transfers through new York. That made them subject to OFAC.

For OFAC compliance, you need to screen all new relationships before engagement in business (clients, vendors, and employees). The OFAC list is updated frequently (there were 54 updates last year.) You need to re-screen periodically and you need a policy to memorialize when you re-screen.

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