News

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

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

Further difficulties are posed by the ‘‘compliance tolerance’’ for financial sanctions being regarded as ‘‘zero failure’’. In practice, a risk-based approach ought be applied by the Money Laundering Reporting Officer (MLRO), operating within the UK regulatory structure, a principle-based regime. A particular difficulty for the MLRO is the extent to which firms should be able to rely upon the due diligence undertaken by the payment screening mechanisms of their regulated correspondent banks.

The daily challenge for the MLRO is balancing such legal requirements with the facilitation of the firm’s commercial interests. On the one hand, a bank’s aim is, after all, to make profit and have an obligation to their shareholders to maximise the return of capital and meet commercial targets previously established within their medium- and longer term business strategies. On the other hand, banks and other financial institutions have a duty to their law-abiding customers, wherever resident, to carry out their lawful instructions, unless the names of such customers appear or the banks are prohibited from doing so by country specific sanctions, such as the OFAC lists.

Generally, compliance with OFAC and other sanctions requires banks to continually review the balance between client confidentiality and privacy with their legal obligations. This is a difficult balance to strike within the context of transaction activity. Indeed, the challenge faced by even the most experienced MLRO is the maintenance of privacy for legitimate customers, while at the same time discreetly deciphering accounts with questionable identities and disclosing this to OFAC or other relevant authority. The complexity of such processes may mean that banks are not as willing to test the line of what is legally acceptable and what is not, especially when the decision to deal with a customer depends on whether their identity is questionable in OFAC terms.

Despite this, banks in the United Kingdom may adopt the view that the costs of compliance are insignificant (the overall compliance costs to banks in the United States is estimated to be trillions of dollars annually for complying with numerous national and international regulatory requirements) compared with the potential loss of reputation.

Whatever the outcome of the present US probes into institutions such as Barclays (NYSE:BCS) and Lloyds TSB, it remains to be seen whether investigators will endeavour to continue to impose stiff penalties against similar institutions, and whether, as the Financial Times stated previously, ‘‘the probe could create political tension between the US and European allies’’.

Jason D. Haines Head, Financial Crime Prevention, Huntswood

1. Under the IEEPA, it is a crime to wilfully violate, or attempt to violate, any regulation issued under the act, including the Iranian Transactions Regulations, which prohibit exportation of services from the US to Iran, and the Sudanese Sanctions Regulations, which prohibit exportation of services from the US to Sudan.

2. US Department of Justice, ‘‘Lloyds TSB Bank Plc Agrees to Forfeit $350 Million in Connection with Violations of the International Emergency Economic Powers Act’’, available at http://www.usdoj.gov/opa/pr/2009/January/09-crm-023.html [Accessed February 6, 2009].

3. On Tuesday March 4, 2008, the Financial Times published an article with the headline ‘‘Lloyds TSB and Barclays in sanctions probe’’. Briefly, the theme concerned two British banks Barclays (NYSE:BCS) and Lloyds TSB who it is alleged had stated through financial disclosures that they had been contacted by the US Department of Justice, the New York district attorney’s office and the US Treasury as part of an ongoing investigation into the banks’ sanctions compliance and are being investigated for potential violations of sanctions against Iran, Libya, Cuba and Sudan. The interest in these two banks by the US authorities is part of a broader investigation into a number of European banks including ABN Amro, which was fined $80 million (£40 million) in 2005, and has set aside a further ¤365 million (£280 million) for further penalties, after it emerged that it had violated US sanctions by processing wire transfers that originated from Iran and engaged in transfers involving Libya.

4. ‘‘Banks braced for fines’’, Financial Times, August 29, 2007.

5. ‘‘HM Treasury warns of higher risk of money laundering and terrorist financing’’, February 29, 2008, available at http://www.hm-treasury.gov.uk/press 20 08.htm [Accessed February 6, 2009].

6. FATF statement, February 28, 2008, available at http://www.fatf-gafi.org/dataoecd/16/26/40181037.pdf [Accessed February 6, 2009].

7. OFAC, which was established in 1950 under President Truman’s regime, is the successor to the Office of Foreign Funds Control (FFC). The later was established at the advent of the Second World War, with the initial aim of preventing Nazi use of the occupied countries’ holdings of foreign exchange and securities and to prevent forced repatriation of funds belonging to nationals of those countries. Later, the FFC played a leading role in economic warfare, by blocking enemy assets and prohibiting foreign trade and financial transactions.

8. ‘‘Quake aid ‘is linked to terror suspects’’’, The Times, August 19, 2006. This article stated: ‘‘A charity founded to help orphans and disaster victims provides a connection between some individuals being questioned by police on suspicion of plotting ‘unimaginable mass murder’ . . . The Charity Commission is looking at reports of links between several British charities and the alleged bomb plot.’’

9. British Bankers’ Association’s written submission to the House of Lords Select Committee on Economic Affairs Inquiry into ‘‘The Impact of Economic Sanctions’’.

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