News

Financial sanctions and OFAC: does the hand fit the glove?

Date: 13 May 09
Reference: The Company Lawyer Vol. 30 No. 5

The New Year brought bad tidings to London’s Financial Community with new evidence of worldwide recession, in particular, the news that Lloyds TSB Bank Plc (Lloyds) had agreed to forfeit $350 million to the United States and to the New York County District Attorney’s Office in connection with violations of the International Emergency Economic Powers Act (IEEPA).

Under the IEEPA, it is a crime to ‘‘willfully violate or attempt to violate any regulation issued under the act’’. Lloyds TSB admitted the falsification of wire transfers involving countries or persons on the US sanctions lists, programmes administered by the Office of Foreign Assets Controls (OFAC). Criminal information was filed in the US District Court for the District of Columbia, charging Lloyds with one count of violating the IEEPA. Lloyds waived indictment, agreed to the filing of the information and accepted and acknowledged responsibility for its criminal conduct. Lloyds agreed to forfeit the funds as part of a deferred prosecution agreement1 with the Department of Justice and the New York County District Attorney’s Office.

According to court documents,2 beginning as early as 1995 and continuing until January 2007, Lloyds, in both the United Kingdom and Dubai, falsified outgoing US wire transfers that involved countries or persons on US sanctions lists. Specifically, according to court documents, Lloyds deliberately removed material information such as customer names, bank names and addresses from payment messages so that the wire transfers would pass undetected through filters at US financial institutions. This process of ‘‘repairing’’ or ‘‘stripping’’, as Lloyds commonly referred to it, allowed more than $350 million in transactions to be processed by US correspondent banks used by Lloyds that might have otherwise been blocked or rejected by sanctions regulations or internal bank policy. According to court documents, the criminal conduct by Lloyds was designed to evade, and to assist its customers evade, US economic sanctions.

Notwithstanding the past four years of press releases3 documenting similar tales of other banks caught in the beam of the OFAC spotlight, many financial institutions in the City do not appear to be prioritising financial sanctions; rather, they are regarded as a fairly recent development in compliance. In many cases, this is due to the banks’ lack of understanding of the relevance of the OFAC regime to its business. Indeed financial sanctions are not a new phenomenon and the US Treasury have been publicising this fact for some considerable time.

In 2007, the US Treasury warned4 more than 40 banks across the world that it would follow a strict interpretation of US restrictions on doing business with Tehran as part of its campaign to persuade financial institutions to break ties with Iran. The following year, Her Majesty’s Treasury (HMT) in the United Kingdom issued a warning5 about the heightened risks of money laundering or terrorist financing in such jurisdictions. The notice reflected the Financial Action Task Force’s (FATF) warning of the higher risks financial crime activity posed by deficiencies in anti-money laundering and counter-terrorist financing in Uzbekistan, Iran, Pakistan, Turkmenistan, Sao Tome and Principe and the northern part of Cyprus.6

In practice, UK firms, within the financial sector, should factor such risks into account and consider applying increased scrutiny and due diligence to transactions associated with such jurisdictions.

Historically, the US Government used financial sanctions as a tool against foreign governments to freeze assets. For example, during the War of Independence, the US Treasury administered sanctions against Great Britain after the harassment of American sailors. During the Civil War in the United States, Congress approved a law which prohibited transactions with the Confederacy, called for the forfeiture of all goods involved in such transactions and provided a licensing regime under rules and regulations imposed by the US Treasury. More recently, such sanctions have been levied against countries which have been identified as supporting terrorism, and more against international terrorist organisations themselves. Following the terrorist attacks on the United States during September 11, 2001, President Bush issued Executive Order 13224. The aim of this order was to significantly expand the scope of US sanctions against international terrorists and their organisations.

This order has encouraged banks and other financial institutions to co-operate with various US government departments. This partnership has been codified in the US Patriot Act, in which the United States Congress recognised a new national security paradigm brought about the events of 9/11, driven by the ethos that information is key to the security of the United States. Banks doing business in the United States are required by law to check the names of their customers against ‘‘lists’’ maintained by the Office of Foreign Assets Control (OFAC), which is a division of the US Treasury.7

As described in OFAC’s 14th Annual Report to Congress, Assets in the United States of Terrorist Countries and International Terrorism Programme Designees, OFAC’s remit is to: administer and enforce economic and trade sanctions based on US foreign policy and national security goals; identify persons for designation; assist US citizens in complying with the sanctions prohibitions through its compliance and licensing efforts; penalise US citizens violating the prohibitions; work with other US government agencies, including law enforcement; and co-ordinate and work with other nations to implement similar strategies.

Prohibited transactions are defined as trade or financial transactions and other dealings in which US citizens may not engage unless authorised by OFAC or expressly exempted by statute. A consolidated list of sanctions targets is maintained in the United Kingdom by HMT, and the European Union maintains its own list. However, the obvious concern for any MLRO operating in a bank, for example, in London, who is charged with scrutinising customer transactions that may contravene such sanctions lists, is whether the list of targets (governments, individuals or groups) published by HMT is the same as that published by the European Union and OFAC. In practice, HMT’s consolidated list consists of the names of targets that have been listed by the United Nations, European Union and the United Kingdom under legislation relating to a specific financial sanctions regime. Where there is a legal basis to freeze assets in the United Kingdom, the name of the target will be included on the HMT consolidated list. Lists provided by OFAC should include names listed under United Nations sanctions regimes but may not include names under European Union imposed sanction regimes.

In the context of the continued terrorist threats, banks must ensure that their corporate governance structures and risk management controls are sensitive to such sanctions. However, it can be argued that since the tragic events of 9/11 in the United States and subsequently 7/7 and 21/7 in the United Kingdom, banks and other financial institutions are very much aware of the statutory and regulatory obligations enforced by the Financial Services Authority (FSA). In particular, such firms are under an absolute obligation to comply with the terms of the various sanctions notices circulated by the HMT (formerly by the Bank of England).

Notwithstanding the usefulness of the 34 different sanctions lists, (the names8 of those arrested in August 2006 were circulated by the Bank of England under their sanctions procedure), there are varying degrees of consistency in respect to both the content and the formatting of the lists.9 For example, there have been occasions when the same sanctioned individual has appeared on both the Bank of England and Office of Foreign Asset Control (OFAC) lists, has been shown with different spellings, posing various challenges for the banks compliance department attempting to undertake due diligence on a target individual or entity.

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