inside the investigation and prosecution of aml/bsa and sanctions: focus on sanctions enforcement...

Inside the Investigation and Prosecution of AML/BSA and Sanctions:

Focus on Sanctions Enforcement

Michael J. Lowell

October 21, 2015

Agenda

• Background

• Legal Authorities

• Enforcement Principles

• “Lessons Learned”

• Trends

• Key Takeaways

Background - OFAC

• Office of Foreign Assets Control (OFAC)

• Administers and enforces economic sanctions programs

Background – Sanctions Programs• Cuba

• Iran

• Sudan

• Syria

• Counter Narcotics Trafficking

• Counter Terrorism

• Cyber-related

• Non-proliferation

• Rough Diamond

• Transnational Criminal Organizations

• Burma

• Ukraine / Russia-related

• North Korea

• Venezuela

• Balkans-Related Sanctions

• Belarus Sanctions

• Central African Republic

• Cote d’Ivoire (Ivory Coast)

• Democratic Republic of Congo

• Iraq

• Lebanon

• Former Liberian Regime

• Libya

• Magnitsky

• Somalia

• South Sudan

• Yemen

• Zimbabwe

Legal Authorities

• Legal Framework

• International Emergency Economic Powers Act, 50 U.S.C. Section 1701-1707 (“IEEPA”)

• Trading With the Enemy Act, 50 U.S.C. Section 5 (“TWEA”)

• 31 C.F.R. 510 – 598

• Various statutes and executive orders

• Reporting, Procedures and Penalties Regulations

• 31 C.F.R. 501

• OFAC Enforcement Guidelines

• 74 Fed. Reg. 57593 (November 9, 2009)

• OFAC Civil Penalties and Enforcement Information

Legal Authorities - Penalties

• Penalties:

• Trading with the Enemy Act - $65,000

• International Emergency Economic Powers Act (IEEPA) - $250,000 or 2x the value of the transaction

• Foreign Narcotics Kingpin Designation Act - $1,075,000

• Criminal Penalties

• $1 million or 2x value; imprisonment

• Larger penalties under Kingpin Act

• Other Consequences:

• Revoked licenses

• Debarment

• Liability for related violations

• Reputational risks

OFAC Sanctions Penalties & Enforcement:Enforcement Principles

• What Triggers an Investigation?

• Self disclosures

• Blocking and reject reports

• Current investigations

• Agency referrals

• Publicly-available information

• Informants


• Strict liability

• Civil penalties may be imposed on a strict liability basis

• In the matter of: Aluminum Company of America, 64 FR 42641-02 (Aug. 5, 1999) (finding that “liability and administrative sanctions are imposed on a strict liability basis once the Respondent commits the proscribed act'')

• Iran Air v. Kugelman, 996 F.2d 1253 (D.C. Cir. 1993) (knowledge is not an “essential element of proof for the imposition of civil penalties'').

• Risk-based compliance

• “OFAC agrees that financial institutions should take a risk-based approach when considering the likelihood that they may encounter OFAC issues.” - www.treasury.gov/resource-center/sanctions/Documents/matrix.pdf

• OFAC will consider “an institution’s risk-based compliance program in assessing the appropriate enforcement response” – 74 FR 57593 at 57597 (Nov. 9, 2009)

http://www.treasury.gov/resource-center/sanctions/Documents/matrix.pdf

OFAC Sanctions Penalties & Enforcement:Enforcement Responses

Criminal Referral

Civil Penalty

Finding of Violation

Cautionary Letter

No Action

Types of Responses

OFAC Sanctions Penalties & Enforcement:Enforcement Responses – General Factors

• Willful or Reckless Violation

• Awareness of Conduct

• Harm to Sanctions Objectives

• Individual Characteristics:

• Commercial Sophistication

• Size of Operations

• Financial Conditions

• Volume of Transactions

• Sanctions History

• Compliance Program

• Remedial Response

• Cooperation with OFAC

• Timing of Apparent Violation

• Other Enforcement Action

• Future Compliance / Deterrence Effect

• Other Relevant Factors

• Totality of Circumstances

Source: 74 Fed. Reg. 57593 (November 9, 2009)

OFAC Sanctions Penalties & Enforcement:Enforcement Penalties

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

20

40

60

80

100

120

92

32

56

104

27 2721

16

27 23

11

OFAC Enforcement Cases

OFAC Sanctions Penalties & Enforcement:Enforcement Penalties

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

Total Civil Monetary Penalties


• Base Calculation of Civil Penalties Under U.S. Law

Not Egregious Egregious

Voluntary Self-Disclosure

One-half of Transaction Value (capped at $125,000 per violation/$32,500 per

TWEA violation)

One-Half of Applicable Statutory Maximum

No Voluntary Self-Disclosure

Applicable Schedule Amount (capped at $250,000 per

violation/$65,000 per TWEA violation)

Applicable Statutory Maximum


• Application to Enforcement Cases (2011-2015)



21 Total: $13,312,009

8Total: $944,800,569


54Total: $25,641,080

15Total: $1,863,505,906

* Double-counts cases where some penalties egregious and some non-egregious; does not reflect cases where OFAC did not make a finding on the issue


• Voluntary Disclosure

• Self-initiated notification to OFAC of an apparent violation prior to or at the same time that OFAC or any federal, state, or local government agency or official discovers the apparent violation or another substantially similar apparent violation

• Not a voluntary disclosure if:

• Apparent violation already discovered by government

• Series of similar apparent violations or related to the same practice or pattern of conduct

• Third-party is required to and does notify OFAC because of blocked or rejected transaction (regardless of when notification was received)

• Contains false or misleading information

• Materially incomplete

• Not self-initiated

• Whistleblower

OFAC Sanctions Penalties & Enforcement:Examples of Egregious Cases

• MSB screening and flagging 136 transactions for $7,091, but dismissing flags 6 times because employees didn’t understand flags or process

• Non-profit transferred $236,000 to Iraq; OFAC put the non-profit on notice of violations and president approved

• Foreign bank processed thousands of transactions through U.S. financial institutions for sanctions targets; management was aware of conduct and exercised “reckless disregard” for sanctions; transactions harmed sanctions objectives

• Large U.S. Bank demonstrated ”reckless disregard” for sanctions requirements

• At least one official with sanctions responsibility identified a deficiency that prevented the bank from identifying potential matches to individuals with multiple or multi-part names

• It took more than 2 years to address the deficiency


• Percentage of Base Penalty Imposed (2011-2015)



Average: 68%Range: 31% - 161%

* Two cases had an increase

Average: 72% Range: 35% - 144%

* Only one case had an increase


Average: 55%Range: 4% - 135%

* One case had an increase

Average: 75% Range: 3% - 310%

* Two cases had an increase

OFAC Sanctions Penalties & Enforcement:Penalty Per Apparent Violation

Forei

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US Man

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Forei

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Forei

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US Insu

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US Ban

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US Ban

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US Man

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US Ban

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US Man

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Forei

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Forei

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US Ene

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Forei

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Forei

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$-

$50,000.00

$100,000.00

$150,000.00

$200,000.00

$250,000.00

$300,000.00

$350,000.00

$400,000.00

$450,000.00

OFAC Enforcement:The Role of the Compliance Program

• No mandatory compliance program

• Risk-based

• General factor affecting administrative action

• Key elements:

• Commitment to Compliance

• Risk Assessment

• Awareness & Training

• Internal Controls

• Responsible Person(s)

• Monitoring/Audits

Applying “Lessons Learned”:Gaps in Screening – Calibration / Keywords

• Identification of key sanctions-related keywords

• Burmese, Cuban, Iranian, Sudanese, Tehran, Khartoum, etc.

• Acronyms

• “BMICJSCMOSCOWRUSSIA”

• Multiple names

• Example: Carlos Alberto Sanchez Osuna

• Name variations

• Example: “Higher Institute for Applied Science and Technology” vs. “Higher Institute of Applied Science and Technology”

• In-process transactions

Applying “Lessons Learned”: Gaps in Screening – Match Resolution

• Match escalation

• Does the match indicate why it was flagged?

• Does the recipient know what to do with it?

• Further prevention

• Block implemented, then what?

• Testing internal controls

• Fix deficiencies

• Evaluate relationships

Applying “Lessons Learned”: Customer / Supplier / Distributor Due Diligence

• Incorporate information / expand vetting:

• Utilizing all information in possession (e.g., customer profile)

• Documents you receive

• Payment instructions

• “Public domain”

• Distributor / partner markets

• Evaluate relationships

Applying “Lessons Learned”: Decision-making, Management, and Participation

• U.S. person approvals / supervision

• Foreign persons in the United States

• Technical support and repairs

• Coordination and involvement of U.S. person

• Successor Liability

Iran30.74%

Cuba28.21%

Syria10.21%

Activities8.11%

Sudan7.68%

Burma4.53%

Ukraine3.37%

Other7.16%

Investigations by Program(Jan. 2014 - Aug. 2015)*

* Source: OFAC 2015 Fall Symposium, Presentation

OFAC Sanctions Penalties & Enforcement:OFAC Investigation Trends

Iran16

Cuba10

Activities**18

Sudan8

Burma2

Other2

Enforcement Cases by Program(Jan. 2014 - Aug. 2015)*

* An enforcement case relevant to more than one program is counted for each program

** “Activities” includes GTSR, WMD, Kingpin, and For-eign Narcotics Programs

OFAC Sanctions Penalties & Enforcement:OFAC Monetary Penalty Trends

OFAC Sanctions Penalties & Enforcement:Trends

“Instead of being a secondary measure, as in the past, economic sanctions have become a centerpiece of national security policy.”

- Washington Post (March 23, 2011)

Libya Protests Begin

(February 15, 2011)

Executive Order 13566

(February 25, 2011)

Pro-Russian Protests in Ukraine(February 23, 2014)

Executive Order 13660

(March 6, 2014)


Iran; 4

Sudan; 3

WMD; 5Burma; 1

Cuba; 3

Iraq; 1

GTSR; 3

Kingpin; 1

North Korea; 1

Penalties Settled (2015)


“[T]he purpose of enforcement action includes raising awareness, increasing compliance, deterring future violations, and not merely punishment of prior conduct.”

- Enforcement Guidelines, 74 Fed. Reg. at 57599.

Key Takeaways

1. Test your screening process for gaps; test screening match escalation

2. Utilize information about your customers / suppliers / partners

3. Risk assessments

4. Change creates risk – consider communication within your organization

5. Address known deficiencies quickly

6. Use the Enforcement Guidelines

7. Reactive vs. Proactive

Michael J. Lowell

• Co-Chair of the firm’s Anti-Money Laundering and Trade Sanctions Group

• Counsels clients on trade and regulatory enforcement matters, including export controls, economic sanctions, anti-money laundering, anti-bribery, and other laws governing cross-border transactions

• Advises multinational companies from a wide range of industries, including financial services, defense and aerospace, manufacturing, life sciences, and energy and natural resources.

• Focuses on the legal regimes that govern international trade, including:

• Sanctions administered by the Office of Foreign Assets Control (“OFAC”)

• Export controls, including the Export Administration Regulations ("EAR") and International Traffic in Arms Regulations ("ITAR")

• Foreign Corrupt Practices Act (“FCPA”)

[email protected]

+1 202 414 9253Washington, D.C.