Archive for the ‘Finance & Banking’ Category

Clearstream Banking Pays $151.9 Million for Transferring Funds to Iran through the U.S.


By: Brooke Driver

On January 23, OFAC announced that Luxembourg-based Clearstream Banking, S.A. has agreed to pay $151.9 Million for alleged violations of the Iranian Transactions and Sanctions Regulations. OFAC points out that the case is an example of the particular risks faced by intermediaries, custodians and other firms in the international security markets. Apparently Clearstream held an omnibus account at a New York bank, through which the Central Bank of Iran maintained a beneficial ownership interest in 26 corporate and sovereign bonds, with a nominal value of $2.8 billion. In connection to this account, Clearstream exported controlled security-related services to the Iranian bank. One of the main factors, surely, in OFAC’s decision to assign such a large fine was the fact that OFAC officials had previously confronted the Luxembourg bank concerning its relationship with the CBI, and, while the institution assured OFAC that it would cease business relations with the bank, it continued to work with the CBI, simply disguising its activities by utilizing a European bank as a custodian for the CBI’s securities entitlements.

Clearly, these violations were committed intentionally, a theory further supported by the fact that Treasury discovered evidence that at least one Clearstream supervisor and one senior executive of the institution possessed knowledge of the illegality of the institution’s actions. OFAC claims that it arrived at the large penalty due to the reckless and egregious nature of the case and the fact that Clearstream did not disclose its violations. However, OFAC greatly reduced the potential fine of $5.6 billion, as the institution has made substantial efforts to improve its compliance program. It’s hard to believe that anyone could be relieved by a nearly $152,000,000 debt, but in this case, I’m sure Clearstream’s officials are feeling just that.

North Carolina Man Jailed and Debarred for Violating ITAR Brokering Rules


By: Brooke Driver

For Donald Bernardo of Matthews, North Carolina, the hits keep on coming. In November of 2011, Bernardo was tried and convicted in a Florida court for his violation of Section 38 of the Arms Export Control Act. Without first registering with the State Department, Bernardo engaged in brokering activities involving Venezuela. Specifically, in return for a fee and commission, he negotiated and arranged contracts, purchases, sales and transfers of regulated C-130 Hercules military transport aircraft. He was sentenced to 12 months of imprisonment and two years of probation at the time of his conviction in November 2011. Upon his release, BIS gave Bernardo a welcome back gift—five years on the denied persons list. For his sake, we hope his commission was worth it.

Illegal Stripping at Standard Chartered Bank Nets $327 Million for OFAC+ Violations


By: John Black

(Editor’s Note: That is perhaps one of the most attention grabbing export control headlines ever.)

On December 10, 2012 the Office of Foreign Assets Control (OFAC) in the US Treasury Department announced a $132 million settlement agreement with Standard Chartered Bank (SCB) to settle alleged violations of US trade embargoes and sanctions. The $132 million OFAC settlement is part of a combined global settlement of $327 million with federal and local government partners. The settlement is related to alleged violations by the London and Dubai offices of SCB of a number of U.S trade embargoes and sanctions programs, including those relating to Iran, Burma, Libya and Sudan and the Foreign Narcotics Kingpin Sanctions Regulations.

“Today’s settlement is the result of an exhaustive interagency investigation into Standard Chartered Bank’s attempts to violate U.S. sanctions programs through the ‘stripping’ from payment messages of critical information,” said OFAC Director Adam J. Szubin. “We remain committed to working with our partners in the regulatory and law enforcement community to ensure that the U.S. financial systems are protected from the risks associated with this type of illicit financial behavior.”

According to OFAC, from 2001 to 2007, SCB’s London head office and its Dubai branch engaged in stripping practices that interfered with the implementation of U.S. economic sanctions by financial institutions in the United States, including SCB’s New York branch. In London, those practices included omitting or removing references to US-sanctioned locations or entities from payment messages sent to U.S. financial institutions. SCB replaced the names of ordering customers on payment messages with special characters, effectively obscuring the true originator and sanctioned party in the transaction; and forwarding payment messages to US financial institutions that falsely referenced SCB as the ordering institution. In Dubai, the practices included sending payment messages to or through the United States without references to locations or entities that the US banks would have spotted as creating US sanctions issues. As a result, millions of dollars of payments were routed through U.S. banks for or on behalf of sanctioned parties in apparent violation of U.S. sanctions.

In addition, SCB’s New York branch settled charges related to eight apparent violations of the Foreign Narcotics Kingpin Sanctions Regulations (FNKSR).

Under the settlement agreement, SCB is required to put in place and maintain policies and procedures to minimize the risk of the recurrence of such conduct in the future. SCB is also required to provide OFAC with copies of submissions to the Board of Governors of the Federal Reserve System (Board of Governors) relating to the OFAC compliance review that it will be conducting as part of its settlement with the Board of Governors.

Sanctions Against Iran Target Foreign Entities Owned or Controlled by U.S. Companies and Hold U.S. Companies Responsible for Their Violations


By: Suzanne Reifman, Vinson & Elkins, 202-639-6577,

Over the past two years, the United States has continued to escalate sanctions against Iran, targeting both U.S. and non-U.S. persons and particularly those persons dealing with or supporting Iran’s energy and financial sectors. On July 1, 2010, the U.S. passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). CISADA amended the existing Iran Sanctions Act of 1996 (ISA) and was designed to expand restrictions on non-U.S. entities that provide goods, services, or other support meeting particular monetary thresholds to Iran’s petroleum industry. The goal of the ISA, as amended by CISADA, is essentially to force non-U.S. companies to choose between doing business with Iran and doing business with the U.S. Following the passage of CISADA, the U.S. has continued to target non-U.S. companies that provide support to Iran through a series of laws and executive orders that have broadened the scope of sanctionable conduct and isolated Iran’s financial sector.

On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA). The law contains many new prohibitions that affect a broad range of industries. In particular, the TRA addresses what many have described as a “loophole” in prior sanctions. Prior to the enactment of the TRA, in many instances foreign subsidiaries of U.S. companies could continue to legally engage in business with Iran as long as the business did not involve the provision of U.S. origin equipment or technology or require facilitation from U.S. persons. The prior sanctions were decidedly less restrictive than U.S. sanctions targeted against Cuba, under which foreign entities owned or controlled by U.S. companies are considered “U.S. persons” and fully subject to all of the sanctions’ requirements. However, under the TRA, any entity “owned or controlled by a United States person and established or maintained outside the United States” is now subject to the range of prohibitions applicable to U.S. persons or persons located in the U.S. with respect to dealings involving Iran.

It should be noted that the definition of “own or control” in TRA is broad, and means “holding more than 50 percent equity interest by vote or value in the entity;” “holding a majority of seats on the board of directors of the entity;” or “otherwise control[ling] the actions, policies, or personnel decisions of the entity.” The TRA does not identify the circumstances in which an entity can be “otherwise control[led]” and no other guidance has been issued. As such, U.S. companies that are parties to foreign joint ventures or similar entities in which they do not hold a majority equity interest or control a majority of board seats will still need to assess their level of control in order to determine whether these foreign entities could be construed as controlled by a U.S. company and, thus, subject to the Iran sanctions that apply to U.S. persons.

The TRA provided that the President would have to implement this provision within 60 days after the law’s enactment. Accordingly, Section 4 of the October 9, 2012 EO formally satisfied this statutory requirement. The EO provides that the penalties for violations of the prohibitions may be assessed against the U.S. person that owns or controls the entity that engaged in the prohibited transaction. The EO also provides that penalties shall not apply if the U.S. person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013. Therefore, given the short grace period allowed for divestment/termination, U.S. companies will need to promptly determine:

  • Does the U.S. company own or control foreign entities that are engaged in conduct involving Iran that would violate U.S. sanctions against Iran? Note that in cases where U.S. companies are involved in joint ventures or other arrangements, it may be difficult to immediately identify all circumstances in which they control an entity based on the broad description set forth in the TRA.
  • If the foreign entity is engaged in business involving Iran, can this business be discontinued prior to February 6, 2013? Note that there is no general license or other authorization that would enable a U.S. company to provide unauthorized facilitation during this process. For example, a U.S. company could not participate in negotiations involving a foreign subsidiary and its Iranian customer to try and mitigate any breach of contract claims that would result from the foreign subsidiary’s termination of a contract.
  • If the owned or controlled foreign entity is either unable or unwilling to discontinue its business with Iran, can the U.S. company divest or terminate its interest in the foreign entity prior to February 6, 2013? Note that unlike the more general ISA sanctions, there is no “safe harbor” provision or other exception that would be granted to a foreign entity owned or controlled by a U.S. company that continues to do business with Iran (even if the entity is in the process of winding down or reducing its business).
  • Does the U.S. company have any of its own licenses from OFAC to engage in transactions involving Iran? If so, the company needs to consider whether it will need to cover any of its foreign owned or controlled foreign entities under these licenses going forward.
  • Can the U.S. company put the appropriate policies and procedures in place at its owned or controlled foreign entities to ensure compliance on a going-forward basis?

Given these issues, compliance with the TRA, as implemented by the October 9 EO, will present a major challenge for many U.S. companies and their owned or controlled foreign entities.

U.S. Targets Foreign Financial Institutions for ‘Causing’ Violations of Sanctions Regulations


By: Christopher R. Wall and Thomas M. deButts

The U.S. Department of Justice and the New York District Attorney’s Office, together with the Office of Foreign Assets Control and federal and state bank regulators, have brought a number of cases in 2009 – 2010 against foreign financial institutions that clear dollar transactions through the United States involving prohibited entities and individuals under U.S. sanctions regulations. In the past, banks not subject to U.S. jurisdiction have generally avoided penalties under these regulations. The U.S. Government, however, has widened its enforcement to target financial institutions outside the U.S. for allegedly “causing” U.S. persons to violate U.S. sanctions regulations.

Deferred Prosecution Agreements and Settlements
Under deferred prosecution agreements, U.S. Department of Justice (DOJ) and New York District Attorney’s Office (NYDA) bring charges by filing a criminal information but agreeing not to prosecute the charges, provided the defendant complies with certain requirements outlined in the settlement. The requirements frequently include stipulating to the facts constituting the alleged violations, paying a monetary penalty, and instituting compliance procedures to prevent future violations. If the defendant abides by the terms of the agreement for a specified period, the charges are dismissed. Failure to comply with the agreement allows the DOJ and NYDA to proceed against the defendent on the basis of their prior stipulated facts.

Lloyds TSB Bank Plc. (Lloyds). Lloyds’ January 2009 deferred prosecution agreements with the DOJ and NYDA included a $350 million payment to settle allegations that Lloyds allowed Iran and Sudan to access U.S. financial institutions in violation of U.S. sanctions regulations and New York criminal law. Lloyds internally “stripped” customer names, bank names, and addresses from SWIFT payment messages to allow them to pass undetected through filters at U.S. correspondent banks. Had the messages contained transparent data concerning the parties, the U.S. correspondent banks would have been required to reject or block the transactions in compliance with U.S. sanctions regulations.

As part of the settlement, Lloyds agreed to employ an independent pre-approved consultant to review and report on five years of transactions. In addition, Lloyds agreed to comply with the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking. In return, the DOJ deferred prosecution for two years and will subsequently dismiss the charges provided Lloyds remains in full compliance with the terms of the settlement.

In December 2009, Lloyds entered into a separate settlement with the Office of Foreign Assets Control (OFAC) agreeing to a $217 million fine, which was credited against the previous payment, and agreed to conduct annual reviews for two years of its policies and procedures and a “statistically significant” review of payments cleared through the United States.

Australia and New Zealand Bank Group, Ltd. (ANZ). In its August 24, 2009 OFAC settlement, ANZ paid $5.75 million to settle allegations of violations of the Sudanese Sanctions Regulations and the Cuban Assets Control Regulations. OFAC alleged that between 2004 and 2006, ANZ illegally processed 31 transactions through U.S. correspondent accounts totaling in the aggregate approximately $106 million. ANZ allegedly manipulated the SWIFT messages “stripping” them of any reference to Sudan or Cuba. ANZ’s actions concealed the identity of the sanctions targets and impeded U.S. financial institutions from identifying the restricted transactions.

OFAC agreed to mitigate the penalty based on three predominant factors. First, although ANZ did not voluntarily disclose the violations, ANZ cooperated in conducting an extensive review of the transactions and brought to OFAC’s attention additional transactions of which OFAC was not aware and which ANZ did voluntarily disclose. Second, ANZ promptly initiated a remedial policy. ANZ re-engineered its operating model to enhance its ability to identify and resolve operational gaps and weaknesses. ANZ agreed to continually audit its compliance model to ensure that future transactions that would be in violation of OFAC’s regulations are not processed by or through U.S. financial institutions. The Australian Prudential Regulation Authority also agreed to monitor the results of ANZ’s internal review. Third, ANZ had not been subject to an OFAC enforcement action in the five years preceding the transactions at issue.

Credit Suisse AG (Credit Suisse). On December 16, 2009, DOJ, NYDA and OFAC announced a record-breaking $536 million settlement with Credit Suisse. The settlement documents alleged Credit Suisse’s involvement in thousands of concealed financial transactions with OFAC target countries processed through U.S. correspondent banks. Credit Suisse allegedly developed procedures to instruct clients on how to structure transactions and Credit Suisse altered payment paths and “stripped” payment messages of any reference to the target countries.

In addition to the fine, the settlement subjects Credit Suisse to a cease and desist order and requires implementation of a transparent global regulatory compliance program. The compliance program must include training for Credit Suisse employees on OFAC-related issues, an audit program designed to test for compliance, and an annual review of the compliance program by qualified personnel.

ABN Amro Bank N.V. (ABN AMRO)/Royal Bank of Scotland (RBS). In 2006, ABN AMRO agreed to a cease and desist order with OFAC and the Board of Governors of the Federal Reserve System. ABN AMRO was assessed a $40 million penalty, which also satisfied a concurrent $30 million FinCen penalty. The violations, which were voluntarily disclosed, involved ABN AMRO’s overseas branches, which removed references to entities in which Libya or Iran had an interest before forwarding wire transfers, letters of credit and U.S. dollar checks to ABN AMRO branches in New York and Chicago. This 2006 settlement, however, did not address criminal penalties.

On May 4, 2010, ABN AMRO, which had since been acquired by RBS, entered into a deferred prosecution agreement with DOJ agreeing to forfeit $500 million in connection with a two-count criminal information. Specifically, ABN AMRO waived indictment on one count of violating the Bank Secrecy Act and one count of conspiracy to defraud the U.S. by violating the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).

The 2010 deferred prosecution agreement details a much broader pattern of violations. The factual statement accompanying the deferred prosecution agreement alleges that from 1998 through 2005, ABN AMRO conducted transactions valued at $500 million in violation of IEEPA, TWEA and the Bank Secrecy Act involving targets of U.S. economic sanctions and ignoring OFAC compliance obligations. ABN AMRO removed or altered names and references to target countries from payment messages. The “stripping” procedures allowed the transactions to pass undetected through filters at U.S. correspondent banks, where they would otherwise have been blocked and reported to OFAC. In addition to altering the payment messages, ABN AMRO failed to maintain adequate anti-money laundering procedures and processes.

ABN AMRO provided prompt and substantial cooperation, committed substantial resources to investigate transactions, and agreed to enhance its compliance policy to ensure transparency. In light of ABN AMRO’s remedial actions, DOJ agreed to recommend dismissal of the information in one year provided ABN AMRO continues to fully cooperate.

Policy Trends and Compliance Risks
These cases are a direct result of the United States’ policy to strengthen U.S. sanctions against Iran, as well as other countries, without explicitly requiring foreign financial institutions to comply with extraterritorial U.S. legal requirements. These cases also reflect a growing trend among enforcement agencies to cooperate on sanctions enforcement, bringing to bear not only the threat of higher monetary penalties but also heightened scrutiny from bank regulatory authorities and potential criminal fines and imprisonment. Regardless of the legal merits and possible defenses that may have been available, these institutions evidently decided to settle rather than face consequences that could have been even more serious.

A number of global financial institutions with headquarters outside the United States have adopted their own internal policies to comply with U.S. sanctions regulations as though they were U.S. institutions, judging that the risks of non-compliance and potential adverse impact on their business in the United States outweighed the risks of continuing to engage in business with countries targeted by U.S. sanctions.

The expanded reach of U.S. enforcement to activities that cause U.S. persons to commit violations within the United States presents a serious compliance risk. Financial institutions that clear dollar transactions through the United States must ensure that they comply with U.S. sanctions regulations.

If you have any questions about the content of this advisory, please contact:

Christopher R. Wall, Washington, DC, +1. 202.663.9250,

Thomas M. deButts , Washington, DC, +1. 202.663.8872,

This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice.

© 2010 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved.

Management Consultant Facing 30 Years in Prison for Iran Violations


By: Danielle McClellan

A former McKinsey and Co. management consultant is currently facing over 30 years in prison after violating the International Emergency Economic Powers Act (IEEPA) and several other violations involving unlicensed money transmitting. Mahmoud Reza Banki, a US citizen, provided money transmitting services to residents of Iran by operating a “hawala” which allows money to be transferred without physically crossing through the banking system. Basically customers transfer money to a “hawala operator” in one country, and then those funds (less any fees) are distributed to recipients in another country by a “hawala associate” on that end. Banki was a hawala operator and received funds from individuals in Saudi Arabia, Kuwait, Latvia, Slovenia, Russia, Sweden, the Philippines, the US and many other countries.

Banki was fully aware that the funds he was receiving were intended to be dispersed in Iranian currency to recipients in Iran. When Banki received the funds he would informed his Iran co-conspirator who then distributed the funds accordingly. It’s alleged that Banki used specific funds that were transferred into his account to make joint investments in the US as well as to purchase a $2.4 million condo in Manhattan and pay $55,000 in one month’s worth of credit card debt, apparently he isn’t the thriftiest spender.

Banki is charged with violating the IEEPA, along with Executive Orders and US Department Treasury regulations; conducting an unlicensed money transmitting business; and conspiracy. He faces a maximum prison sentence of 5 years for each conspiracy and unlicensed money transmitting count and up to 20 years in prison for the IEEPA count.


Credit Suisse Gets $536 Million Fine


By: Danielle McClellan

OFAC recently announced its largest sanctions policy ever…$536 million. Credit Suisse AG, a Switzerland-based bank agreed to the momentous fine after processing 5,000 electronic funds transfers (EFTs) on behalf of banks and individuals in Cuba, Iran, Sudan, and Burma among other countries.

The settlement agreement describes an intricate scheme of processing code names, modifications to internal controls, and procedures designed to avoid any detection of involvement with Iranian banks in transactions processed through US banks. The 5,000 EFTs that were uncovered were all processed through Credit Suisse’s US subsidiary after the bank had altered information that would have otherwise been detected because of prohibited parties. The settlement also specified that several Credit Suisse executive and employees, including an individual responsible for compliance, were aware of the activities and the fact that US laws were being violated.

Credit Suisse voluntarily disclosed its own internal investigation of the illegal EFTs to OFAC in 2006, however the company failed to notify OFAC of another internal investigation it was conducting in a US dollar clearing bank for payments which involved sanctioned countries and persons. Credit Suisse did finally disclose this investigation to OFAC in 2007 but, by that point, OFAC had already launched its own investigation into these matters, causing Credit Suisse not to receive voluntary disclosure credit for those violations. The bank was charged with the following violations:
•    10 violations of Furnishing information about business relationships with boycotted countries or blacklisted persons involving transactions with Syria (15 CFR 760.2(d))
•    5 violations of Refusal to do business (15 CFR 760.2 (a))
•    5 violations of Furnishing to report the request to engage in a restrictive trade practice or foreign boycott (15 CFR 760.5)

The lessons to learn from this case are that international entities that are subject to US jurisdiction need to be aware of the risks involved in dealing with prohibited parties and when voluntarily disclosing any violations-disclose all violations, even suspected ones (OFAC’s economic sanctions enforcement guidelines offer a 50% reduction in fines with voluntary disclosure “credits”).


Lloyds TSB Bank Pays $217 Million Fine


By: Danielle McClellan

Lloyds TSB Bank, plc, located in London has agreed to pay a settlement of $217 million to settle allegations of violations of the Iranian Transactions Regulations, the Sudanese Sanctions Regulations, and the Libyan Sanctions Regulations. Apparently the bank had a policy to deliberately change and delete information in wire transfers regarding Iran, Sudan, and Libya to ensure that third-party US banks would not discover the sanctioned parties. Between June 2003 and August 2006, the bank routed close to 4,200 electronic funds transfers with a total value of $36,988,457 through US banks.

The bank cooperated with OFAC’s investigation but did not voluntarily disclose the violations. Lloyds hired an independent consulting firm to review all incoming and outgoing payment messages and monthly account statements for accounts in question during their review period and provided all findings to OFAC. Lloyds has also agreed to have its Internal Audit Department conduct annual audits for the next 2 years and provide these reports to a qualified independent auditor to certify the findings.

Lloyd’s obligation to pay the $217 million fine has been deemed satisfied by their recent settlement payment of $350 million made in early 2009.


Canada Implements Export and Financial Sanctions on Burma



By: Danielle McClellan

Canada has released the implementation to the Special Economic Measures (Burma) Regulations applying sanctions against Burma.

The main measures taken by Canada prohibit:

  1. The export from Canada to Burma of any goods, excepting only the export of humanitarian goods
  2. The export of technical data
  3. The provision of financial services to Burma

Canada implemented the new sanctions in light of resolutions by both the United Nations Commission on Human Rights and the General Assembly who condemned the human right violations in Burma at this time.

More information:

GAO Study Says US Embargo on Iran Is Ineffective



By: Danielle McClellan

In 2006, the U.S. National Security Strategy stated that the United States was facing challenges from Iran and its efforts and involvement in international terrorism. The GAO has since reviewed U.S. sanctions against Iran and the impact it has had and reviewed numerous data relating to Iran’s economy and energy sector.

After conducting research, the GAO concluded that Congress should consider requiring the National Security Council and key agencies to:

  1. Assess data on Iran sanctions and complete an overall baseline assessment of sanctions
  2. Develop a framework for ongoing assessments
  3. Periodically report the results to Congress

Officials did report that U.S. sanctions involving Iran has slowed foreign investment in the country’s petroleum sector, however other evidence indicates that the extent of the reported impact. (more…)