On August 27, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) entered a settlement agreement with First Bank SA (“First Bank”), located in Romania, and its U.S. parent company, JC Flowers & Co. (“JC Flowers”). According to a press release, the companies agreed to pay $862,318 to settle potential civil liability related to First Bank’s processing of transactions in apparent violation of OFAC’s Iran and Syria sanctions programs. More specifically, First Bank processed 98 commercial transactions totaling $3,589,189 through U.S. banks on behalf of parties located in Iran and Syria. In 2018, after JC Flowers acquired a majority ownership interest in First Bank, First Bank processed Euro-denominated payments for persons located in Iran.
This settlement agreement emphasizes the broad scope of U.S. sanctions regulations applicable to transactions processed through the U.S. financial system or within the United States. Thus, non-U.S. companies should continue to conduct due diligence to determine whether a transaction involves a U.S. nexus, including U.S. persons, U.S. dollars, or the U.S. financial system.
The Apparent Violations
In 2019, First Bank’s regulator, the National Bank of Romania, flagged a U.S. dollar transaction that First Bank had processed for a shipment of timber from Romania to Syria. As a result, First Bank commenced a five-year lookback in March 2019 and voluntarily self-disclosed the results to OFAC.
According to OFAC, the following payments violated sections 560.203, 560.204, and 560.215 of the Iranian Transactions and Sanctions Regulations, 31 CFR part 560, and sections 542.205 and 542.207 of the Syrian Sanctions Regulations, 31 CFR part 542.
- First Bank processed 34 outgoing payments, totaling $991,246, through U.S. banks in which the end user of the underlying commercial transaction was in Iran and the payments were made on behalf of Iranian customers of First Bank.
- First Bank processed 36 outgoing payments, totaling $1,061,104, through U.S. banks in which the underlying trade finance documentation showed that the importers were located in Syria.
- After JC Flowers acquired a majority ownership interest in First Bank, First Bank processed 28 Euro-denominated payments, totaling $1,536,840, 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. (Non-U.S. entities that are majority-owned by U.S. persons are required to comply in all respects with U.S. sanctions against Iran.)
The settlement agreement explains that the Apparent Violations resulted from First Bank’s lack of understanding of the scope of U.S. sanctions regulations applicable to financial institutions without a physical presence in the United States. In particular, the bank’s training and procedures for monitoring potential sanctions-related activity did not address the risk that First Bank could be indirectly exporting financial services through the U.S. financial system to sanctioned parties or comprehensively sanctioned jurisdictions, or processing transactions that did not transit the United States but were processed while majority owned by a U.S. person.
The Penalty Analysis
The statutory maximum civil monetary penalty was $31,159,872. However, OFAC considered the fact that First Bank voluntarily self-disclosed the Apparent Violations and that the Apparent Violations constituted a “non-egregious case.” Accordingly, under OFAC’s Economic Sanctions Enforcement Guidelines (“Enforcement Guidelines”), the applicable base civil monetary penalty amount was $1,742,056. Ultimately, the settlement amount of $862,318 reflected OFAC’s consideration of the General Factors under the Enforcement Guidelines.
OFAC determined the following to be aggravating factors:
- First Bank failed to implement appropriate controls to comply with applicable U.S. regulations with respect to payments it processed with a sanctions nexus that transited the U.S. financial system, or after the bank became a foreign subsidiary of a U.S. person.
- First Bank failed to implement adequate internal controls necessary to ensure transactions with a U.S. sanctions nexus would be escalated to management for additional review, consistent with its existing compliance policy.
- First Bank had actual knowledge or reason to know it was processing payments on behalf of persons in Iran and Syria because of underlying finance and trade documents in its possession that referenced those countries.
- First Bank conferred $3,589,189 in economic benefit to persons in Iran and Syria.
OFAC determined the following to be mitigating factors:
- OFAC had not issued a Penalty Notice or Finding of Violation to First Bank in the five years preceding the earliest date of the transactions giving rise to the Apparent Violations.
- The companies cooperated with OFAC’s investigation into the Apparent Violations by conducting a historical lookback and by entering into a tolling agreement with OFAC.
- First Bank (i) updated its sanctions screening tool; (ii) terminated relationships with customers party to the subject transactions; and (iii) implemented enhanced diligence procedures to collect more information on the nature of transactions and potential for involvement with sanctioned jurisdictions, territories, or parties.
- First Bank implemented enhanced policies and procedures to address the relevance and applicability of U.S. sanctions regulations to the processing of transactions that transit the U.S. financial system, as well as those payments processed by an entity owned by a U.S. person.
- First Bank more than doubled its compliance staffing overseeing sanctions and related issues to provide more resources toward enhanced screening and monitoring.
- First Bank conducted additional sanctions training with staff, and First Bank, following approval by its Supervisory Board, issued a new global sanctions policy.
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