July 27, 2015

Week in Review and Look Ahead

by Jeremy Paner

The U.S. Department of the Treasury was quite active last week in its efforts to tighten sanctions against the Lebanese-based terrorist group Hizballah and the rogue state of North Korea, combat money laundering used to hide terrorism and narcotics finance, and enforce economic sanctions against proliferators of weapons of mass destruction (WMD). The Office of Foreign Assets Control (OFAC), the Financial Crimes Enforcement Network (FinCEN), and the Federal Deposit Insurance Corporation (FDIC) all took action to safeguard the U.S. financial system. Once again, it is apparent that Treasury continues to concentrate and coordinate its actions on Hizballah.

Last week also signaled a recent significant shift at FinCEN that will result in a drastic increase in its 311 actions. Businesses that rely on foreign banks – especially those in Central and South America and the Middle East – should be on notice that they are now much more likely to be cut off from the U.S. financial system.

The Office of Foreign Assets Control  

On July 21, OFAC designated four individuals for their roles in Hizballah’s support of the Assad regime. Three of the individuals were designated pursuant to Executive Order (EO) 13582 for providing high-level military support to the Assad regime in Syria. OFAC designated the fourth designee pursuant to EO 13224 (the counterterrorism authority). In its press release announcing the designations, Treasury describes this person as “Hizballah’s point person for the procurement and transshipment of weapons for the group and its Syrian partners for at least 15 years.”

On July 23, OFAC designated Singapore-based Sanat Shipping Company and its President for providing material support to a shipping company previously designated by the United Nations and OFAC for smuggling arms into North Korea. OFAC made these designations pursuant to EO 13551, which blocks those that send weapons to North Korea. In addition to adding these new listings, OFAC updated the List of Specially Designated Nationals (SDN List) with new aliases used to evade sanctions against a designated North Korean weapons shipper and bank officials.

OFAC announced on July 24 that it reached an agreement with Great Plains Stains (GPS) Co. to settle apparent violations of sanctions imposed against a designated proliferator of WMD. According to the announcement, GPS agreed to pay $214,000 to settle violations arising from its use of a blocked vessel to transport goods from Shanghai to Dubai. Interestingly, OFAC concluded that the violations were non-egregious, irrespective of its finding that GPS willfully stripped references to the blocked vessel from the trade documents and did not follow explicit instructions OFAC provided about the same. The non-egregious determination was probably a result GPS’s inability to pay the $250,000 maximum base penalty per violation which results from egregious violations of WMD-related sanctions that are not self-disclosed to OFAC.

Financial Crimes Enforcement Network

On July 23, FinCEN issued a Final Rule (31 C.F.R. 1010.658) pursuant to Section 311 of the USA PATRIOT Act, imposing “special measure five” against FBME Bank Ltd. (FBME). Although it is a subsidiary of the Federal Bank of Lebanon, a private Lebanese bank, FBME is headquartered in Tanzania and holds the vast majority of its assets in Cyprus. FBME is owned by the same two individuals that own the Federal Bank of Lebanon. FinCEN explains in its Final Rule that FBME has deposited hundreds of thousands of dollars from a Hizballah financier and has an extensive customer base of shell companies. Although FinCEN provides a multitude of bases for the 311 action,  this Hizballah connection clearly led to the bank’s formal severance from the U.S. financial system.

This final rule followed the July 2014 Notice of Finding that FinCEN had reasonable grounds for concluding that FBME is a “financial institution of primary money laundering concern.” Although the special measure five prohibitions on correspondent or payable-through accounts by U.S. financial institutions were not imposed until the issuance of this Final Rule, it is highly likely that U.S. banks severed their accounts following the 2014 Notice of Finding.

U.S. financial institutions, as defined under the Bank Secrecy Act, should take careful note of two requirements contained within this Final Rule. The first, is to use commercially-reasonable tools to determine the current subsidiaries of FBME. The definition section of the Final Rule defines FBME to include all branches, offices, and subsidiaries. (31 C.F.R. 1010.658(a)). Therefore, the prohibitions against FBME apply prospectively to any subsidiary that may be formed in the future.

Secondly, the Final Rule prohibits indirect use of accounts in the United States, and requires U.S. financial institutions to employ “special due diligence” to its foreign correspondent accounts to prevent processing transactions involving FBME. This special due diligence must include notification to correspondent account holders that provide financial services to FBME that they cannot process such services through their U.S. accounts, and an identification of any use of its foreign correspondent accounts by FBME. (31 C.F.R.1010.658(b)(2)).

Federal Deposit Insurance Corporation

On July 22, the FDIC announced a $140 million civil penalty against Banamex USA, a business unit of Citigroup Inc., for its repeated violations of Bank Secrecy Act (BSA) anti-money laundering (AML) controls, and the FDIC’s Rules and Regulations. As an insured state bank that is not part of the Federal Reserve system, the FDIC served as the functional regulator of Banamex. The applicable FDIC regulations mandate that an AML compliance program shall, at a minimum:

  • Provide for a system of internal controls to assure ongoing compliance;
  • Provide for independent testing for compliance to be conducted by bank personnel or by an outside party;
  • Designate an individual or individuals responsible for coordinating and monitoring day-to-day compliance; and
  • Provide training for appropriate personnel. (12 C.F.R. 326.8).

According to the press release announcing this penalty, Banamex USA failed to implement a compliance program that fully addressed any of these minimum requirements. Despite Citigroup’s recent decision to close the bank, a press report indicates that the U.S. Attorney’s Office in Boston and FinCEN are both continuing investigations into its potentially criminal activities.

We will continue to monitor Treasury’s enforcement of economic sanctions and anti-money laundering controls and publish updates as new developments arise.