The Office of Foreign Assets Control has never been shy in asserting its sanctions enforcement jurisdiction. In a couple of recent penalty cases, the agency determined that foreign companies appeared to be in violation because their activities “crossed the line” into the United States. This provided OFAC with enough of a hook to assert jurisdiction over the non-U.S. parties. Parties located outside the United States should take note that they are not necessarily outside OFAC’s grasp.
Indirect Exports of Banking Services Trips Up Foreign Bank
Our first case involved Mashreqbank psc, a United Arab Emirates bank with a London branch that processed payments through the United States. Unfortunately, a total of 1,760 of those payments were on behalf of Sudanese banks. At the time, the direct or indirect exportation of services to Sudan was prohibited by the now-revoked Sudanese Sanctions Regulations.
Payment requests issued by Mashreqbank’s London branch failed to disclose that Sudanese banks were involved in the transactions. As a result, the U.S. institutions processing the payments were unaware that the Sudanese sanctions were even applicable. As OFAC’s Enforcement Release summarized, “Because the payment messages sent to the U.S. financial institutions did not include the originating Sudanese bank, Mashreq’s U.S. correspondents could not interdict the payments, and the payments were successfully processed through the U.S. financial system. Mashreq’s processing of these payments for or on behalf of Sudanese financial institutions constitutes a prohibited export of services from the United States to Sudan.”
Second and Third Verse, Same as the First
A similar pattern is found in our second case. A Romanian bank, First Bank SA, processed dollar-denominated payments through U.S. banks on behalf of Iranian or Syrian customers for transactions in those countries. As a result, the U.S. banks exported financial services to those countries. These activities constituted respective violations of the Iranian Transactions and Sanctions Regulations and Syrian Sanctions Regulations.
Making things worse, in the midst of these transactions First Bank was acquired by a United States financial institution. This subjected it to the “Prohibitions on foreign entities owned or controlled by U.S. persons” set forth in 31 C.F.R. § 560.215. Its “payments totaling $1,536,840 outside the U.S. financial system involving Iranian parties and interests where there was no applicable authorization or exemption, with actual knowledge or reason to know that the payments were for Iranian parties.” Thus, its non-U.S. transactions on behalf of Iranian parties qualified as violations as well.
Finally, in our third case, Bank of China UK processed the proceeds of transactions involving Sudanese parties through correspondent U.S. banks. Bank of China UK’s employees apparently overlooked references to Sudan in the transactions’ documents and failed to realize that payments involving Sudanese parties could not be channeled through the United States.
The Takeaway: OFAC Has a Long Reach
None of the three cases appears to have involved deliberate attempts to evade OFAC sanctions; certainly, evasion was not among the violations charged. Instead, they reflect a failure to appreciate that a financial transaction involving a prohibited party or country does not become acceptable when processed through an intermediary country. The fact that funds arising from Iranian, Sudanese or Syrian sources went to a third country, then to the United States, and back again is what made these indirect exports of financial services.
The three parties involved happened to be banks, and my view is that financial institutions are particularly vulnerable to these types of violations. This is because the U.S. banking system is nearly unavoidable for processing dollar-denominated transactions. In principle, however, the same type of indirect export theory could be extended to other parties involved in transactions with prohibited parties and destinations, such as buyers and sellers. I’m not aware that OFAC has gone that far, and I don’t want to give the agency any ideas, but I’m not sure there’s a bright line for where the cutoff is.
The three cases also have informative discussions of OFAC’s criteria for determining proposed settlement amounts for apparent violations. The main point, however, is how OFAC defines indirect exports that violate various sanction regimes. Avoiding these missteps will ensure that the settlement factors never come into play.
Thompson & Associates, PLLC provides representation in all aspects of customs laws and regulations, specializing in export and import regulations and international business counseling. We can be reached at 202-772-2039 or online.
