By George W. Thompson
Here’s a case worth noting. Barclays Bank Plc has agreed to a penalty of $2,485,890 to resolve alleged violations of the Zimbabwe Sanctions Regulations administered by the Office of Foreign Assets Control (OFAC).
A settlement by a foreign financial institution for transgressions involving one of the more obscure OFAC programs may not, at first glance, seem to warrant mention. That would be too narrow a reading, however. This settlement instead highlights a compliance challenge of general applicability. I call it the hidden SDN issue.
The “Hidden SDN” Problem
The Zimbabwe regulations, like other OFAC sanctions programs, prohibit transactions with “entities” in which one or more Specially Designated Nationals (SDNs) has a greater than 50 percent ownership interest. Assets of such entities are blocked, just as are those of the SDN owner(s). Unlike SDN’s, though, as a general rule these entities are not specifically identified by OFAC. Hence, I characterize them as hidden SDNs.
Inadequate Customer Screening Results in Prohibited Transactions
Barclays’ affiliated bank, Barclays Bank of Zimbabwe Limited, processed financial transactions for certain corporate customers owned by a named SDN. The kicker is that Barclays did try to identify hidden SDNs. Barclays Zimbabwe was barred under local law from complying with the OFAC sanctions, so Barclays conducted the customer screening process in the United Kingdom. Its electronic database did not identify a customer’s beneficial owner, however, even though that information appeared in paper records. Barclays Zimbabwe also failed to provide beneficial ownership information, contrary to its own “know your customer” policy.
These screening limitations meant that transactions involving three companies owned by SDN Industrial Development Corporation of Zimbabwe were processed, with funds flowing through Barclays’ branch in New York. Other, unrelated U.S. banks processing the funds flow did identify the relationship, blocked the fund transfers and notified OFAC. Since the agency already knew of the violations, Barclays was disqualified from seeking voluntary disclosure status. The penalty amount reflected OFAC’s view that the violations were “non-egregious”.
An Issue of General Applicability
The “hidden SDN” issue is not limited to the Zimbabwe sanctions, nor to financial institutions. All “U.S. persons” are covered.
OFAC has issued a general advisory stating that:
Persons whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (blocked persons) are considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest. Consequently, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC’s list of Specially Designated Nationals (“SDNs”). Accordingly, a U.S. person generally may not engage in any transactions with such an entity, unless authorized by OFAC.
Publication of Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property Are Blocked, 79 Fed. Reg. 47726 (Aug. 14, 2014), available here.
Sellers and buyers of goods and services, freight forwarders, banks and other financial institutions – any United States companies or other U.S. persons involved in international trade – are equally affected.
Who Owns That Customer?
The problem, as discerning readers realize and Barclays eventually learned, is that no central listing of entities owned by an SDN exists. OFAC expects you to identify companies that it can’t. This gap means that the usual process of screening against the SDN list is inadequate.
Instead, a U.S. person must delve into prospective customers’ ownership details and document those inquiries. The process that Barclays should have followed, identifying beneficial owners and including that information for customer screening, is a painstaking process but seems to provide the most effective way of meeting OFAC’s requirements.
