6. Enforcement and Conducting or Supporting Investigations into Sanctions Violations Flashcards
Session 6
What does OFAC say are the goals and principles of having a sanctions compliance system?
§ The goal of a sanctions compliance system is to prevent sanctions violations.
§ Violating sanctions laws can trigger severe penalties (especially in the United States).
§ The U.S. has by far the most thorough record regarding enforcement of sanctions laws.
§ However, many of the U.S. sanctions principles are applicable to sanctions compliance in other countries as well.
Who is the agency responsible for administrating and enforcing US Sanctions Laws?
The Office of Foreign Assets Control (OFAC)
~ It’s not a regulator
~ It’s an enforcer
~ It considers itself a National Security Agency
It has Wide investigative powers.
§ It relies heavily on other agencies, especially in the financial
industry, for assistance.
§ Works closely with:
§ FinCEN, the U.S. financial intelligence unit (enforcer of Anti-Money Laundering Laws;
§ Department of Commerce’s Bureau of Industry and Security (BIS); § State Department
§ U.S. intelligence agencies (CIA, DIA, NSA, etc.)
§ Bank examiners
*OFAC can call upon all the resources of the Federal Gov’t and State Gov’t as well.
What were the 11 identified “root causes” OFAC indicated leads to sanctions Violations?
OFAC published A Framework for OFAC Compliance Commitments in 2019
1) Lack of formal OFAC Sanctions Compliance Program (SCP);
2) Misinterpreting, or failing to understand the applicability of, OFAC’s regulations;
3) Facilitating transactions by non-US persons (including through or by overseas subsidiaries or affiliates); and
4) Exporting or re-exporting US origin goods, technology or services to OFAC- sanctioned persons or countries.
6) Utilizing the US financial system, or processing payments to or through US financial institutions, for commercial transactions involving OFAC sanctioned persons or countries;
7) Faults in sanctions screening software or filter;
8) Improper due diligence on customers/clients (e.g. establishing ownership, business
dealings, etc); - This is where the 50% rule comes in.
9) De-centralized compliance functions leading to an inconsistent application of an SCP;
10) Utilizing non-standard payment or commercial practices; and
11) Individual liability. Can take two forms 1) Someone makes an error or 2) an individual deliberately evades sanctions.
What does OFAC consider when deciding a penalty?
OFAC has published “OFAC Enforcement Guidelines which identify the factors OFAC will use in deciding whether to assess a penalty, and what penalty to impose:
- Willful or Reckless Violation
- Awareness of conduct
- Harm to sanctions program objectives
- Individual Characteristics
- Commercial sophistication of company
- Size of operations and financial condition of company
- Volume of transactions processed by company
- Sanctions history with OFAC
- Strength of compliance program
- Remedial Response
- Cooperation with OFAC
- Timing of apparent violation in relation to imposition of sanctions
- Other enforcement history
- Future compliance / deterrent effect of an enforcement action
- Any other factors OFAC deems relevant
What are possible OFAC Enforcement Actions?
Types of Enforcement Response from OFAC…
- No Action
- Cautionary Letter - Internal not publicized
- Finding of Violation - Publish on website
- Civil Monetary Penalty
- Other Administrative Remedies (e.g. update sanctions program, attest you fixed the problem, or specify something specific be done on certain transactions (e.g. MT202 Message for certain types of payments)
- Criminal Referral - turn the matter over to DOJ for criminal prosecution.
But bear in mind, sometimes OFAC is just the start…
- Regulatory pile-on effect - when other regulatory bodies get involved
- Legal costs
- Reputational damage - can have commercial effects - no one wants to do with business with you.
What is involved in an OFAC Settlement?
§ OFAC and the Subject Person may also settle an investigation.
§ OFAC and the Subject Person agree on any penalties and action required.
§ Probably the most common outcome in investigations where OFAC has decided to impose a monetary penalty
§ In addition to paying a civil penalty, a settlement agreement may also require the Subject Person to undertake certain actions. A common requirement is that the Subject Person demonstrate after a fixed period that its sanctions compliance system can effectively detect and prevent sanctions violations.
§ Not considered final agency action for legal purposes, so that the matter can be reopened by either party.
*Common terms in a settlement - “The party being investigated doesn’t comply with the terms of the agreement OFAC can reopen the investigation”.
What is OFAC’s Civil Penalty Procedure?
OFAC follows a formal procedure before it imposes civil penalties.
These steps are:
1. The initial investigation
- Pre-penalty notice: a formal notice to the Subject Person that OFAC has preliminarily
determined that a violation has occurred. The notice will include a description of the violation and the proposed penalty. - Response to the pre-penalty notice. The Subject Person has an opportunity to respond
to the pre-penalty notice. It can agree with the notice, or argue that either there was no
violation, or that the penalty should be less than that proposed by OFAC. - Penalty notice. This is OFAC’s formal notice that it is imposing a civil penalty. It constitutes final agency action for legal purposes.
- Referral to the Financial Management Division. The issuance of a penalty notice creates
a debt the Subject Person owes the U.S. federal government. The Financial Management Division is the actual collector of the debt.
What Two factors weigh heavily on what the OFAC penalty amount will be?
- Egregious vs. non-egregious conduct
- When deciding if something is egregious or not, OFAC considers:
a)whether it was willful or reckless
b)awareness of conduct
c)harm to sanctions program
d)individual characteristics
- Voluntarily self-disclosure
- A self-initiated notification to OFAC of an apparent violation prior to, or at the same time that OFAC discovers it or another substantially similar apparent violation.
- Notification is not a voluntary self-disclosure if:
a) a third party is required to, and does, notify
OFAC (like a block or reject report);
b) the disclosure contains false or misleading information;
c) the disclosure is materially incomplete;
d) the disclosure is not self-initiated, such as when prompted by your regulator; or
e) the disclosure is made by a whistleblower.
How does OFAC calculating a Penalty amount?
Published in OFAC’s Enforcement Guidelines there is a OFAC Base Penalty Matrix.
Consist of two factors.
1) How Egregious the case is
2) Was there a Voluntary Self-Disclosure
*In Europe self disclosure is not recommended without legal consul first.
*OFAC Penalty Matrix would not apply to EU member states
How does OFAC work with other agencies?
OFAC often works with various agencies on enforcement.
Financial services overlap: The Federal Reserve System, the Office of the Comptroller of the Currency, and the New York Department of Financial Services
Export control overlap: Department of Commerce’s Bureau of Industry and Security (BIS) or Homeland Security Investigations (HSI).
Narcotics related overlap: Drug Enforcement Administration (DEA) or HSI.
Other criminal matters, including terrorism and proliferation: Federal Bureau of Investigation (FBI). Wherever there is overlap with ongoing criminal cases, OFAC will also coordinate with the relevant US Attorney’s Office and the relevant sections within the Department of Justice (DoJ). It may also receive information from and provide information to the U.S. intelligence agencies.
Remember: There is constant sharing of information between regulators
What are the Investigative and Enforcement Agencies OFAC works with?
Federal Agencies:
Treasury Department:
~ Office of Foreign Assets Control (OFAC)
~ Financial Crimes and Enforcement Network (FinCEN)
~ Federal Reserve System
State Department:
~ The Directorate of Defense Trade Controls (DDTC)
Justice Department:
~ Department of Justice (DOJ)
~ Drug Enforcement Administration (DEA)
Commerce Department:
~ Bureau of Industry and Security (BIS)
State Agencies:
~ New York Department of Financial Services (NYDFS)
Does BIS have a list like OFAC?
Yes the BIS Lists
§ Denied Persons List: A list of individuals and entities that have been denied export privileges from the United States. Any dealings with a party on this list that would violate the terms of its denial order are prohibited.
§ Entity List: A list of foreign parties that are prohibited from receiving some or all items subject to the EAR unless the exporter secures a license.
§ Unverified List (UVL): A list of parties whose bona fides BIS has been unable to verify. No license exceptions may be used for exports, reexports, or transfers (in- country) to parties on this list. A statement must be obtained from such parties prior to shipping items not subject to a license requirement.
Who is BIS?
§ The Bureau of Industry and Security administers most U.S. export controls
§ It is part of Department of Commerce
§ It is the agency responsible for regulating export of commercial and “dual-use” items (goods, technology and software), i.e., items that have both commercial and military or proliferation applications.
§ Also regulates certain commercial items (“EAR99” items), generally low-technology consumer goods, that do not usually require a license (except for exports involving certain restricted parties, end uses, and embargoed countries, including Crimea, Cuba, Iran, North Korea, and Syria).
Does BIS perform Investigations?
Yes.
§ Investigates possible violations of U.S. export control laws and imposes penalties for violations.
§ Works closely with OFAC, especially where an export control violation involves a country subject to sanctions.
Example: ZTE case, where BIS and OFAC cooperated in investigating a China company that was purchasing U.S.-origin products subject to export controls and then re-exporting them to Iran and North Korea.
Who is the Department of State?
§ Has direct responsibility for sanctions administration and enforcement in some areas such as defense exports and arms embargoes.
§ Responsible for designating persons and entities who have violated U.S. secondary sanctions
§ May designate as Foreign Terrorist Organizations (FTOs) (foreign individuals or entities found to have committed, or which pose a significant risk of committing, acts of terrorism that threaten US national security, foreign policy, or its economy.
Who is the Department within the Department of State?
§ The Directorate of Defense Trade Controls (DDTC) is agency within the State Department.
§ DDTC administers the exportation of defense articles under the International Traffic in Arms Regulations (ITAR).
§ ITAR contains the U.S. Munitions List, which is a comprehensive list of all defense articles and services subject to ITAR.
Who is the Federal Reserve?
§ The Federal Reserve is the central bank of the U.S., and is responsible for supervision of bank holding companies.
§ The Federal Reserve has some bank supervisory and regulatory functions, including supervision over the foreign activities of U.S. banks and the U.S. activities of foreign banks.
§ Though its focus is primarily on the prudential aspects of bank regulation, it will investigate whether banks subject to its supervision have committed sanctions violations.
§ Along with OFAC, the Federal Reserve has been involved in a number of cases involving violation of U.S. sanctions laws by foreign banks.
Who is FINCEN?
Plays a significant if indirect role in sanctions enforcement.
Collects and analyzes data about electronic financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.
Implements, administers and enforces compliance with the Currency and Foreign Transactions Reporting Act of 1970, commonly known as the Bank § Secrecy Act, or BSA.
FinCEN can impose “Special Measures” under Section 311 of the USA Patriot Act (31 USC Section 5318A), which addresses sanctions violations, money laundering and terrorist financing. This provision authorizes FinCEN to impose “special measures” on financial institutions, if it finds that they are of “primary money laundering concern.”
Issues guidance, especially for financial institutions, that is relevant to sanctions
compliance.
