How should we approach competing sanctions risks?
Among the numerous regulatory compliance risks faced by financial institutions, economic and trade sanctions risks commonly receive a great deal of attention. The imposition (and re-imposition) of additional secondary sanctions by the US, together with the number of high-profile US enforcement matters involving financial institutions, only adds to the risks that financial institutions must consider when evaluating their sanctions compliance strategy. Non-US financial institutions are not immune from such risks. Yet they must consider these risks in the context of local legal requirements that impact sanctions compliance, including the EU Blocking Regulation.
Non-US financial institutions have good reason to avoid engaging in conduct that violates US sanctions. If a non-US financial institution engages in conduct that causes a US person to violate sanctions (for example, if a non-US financial institution causes a US financial institution to process a transaction involving a sanctioned person), the non-US financial institution can itself violate the sanctions, exposing the non-US financial institution to liability.
In the past five years, over 25 financial services industry firms have entered into settlement agreements with the US Treasury Department’s Office of Foreign Assets Control (OFAC), while several others have been the subject of published notices regarding their activities having violated the regulations. While details of the violations vary, a number of the violations described in the settlements involved the processing of transactions (whether directly or indirectly) through US financial institutions that involved countries, entities or individuals that were targets of US sanctions programmes. State agencies such as the New York State Department of Financial Services have brought enforcement actions against a number of non-US financial institutions based on violations of US sanctions.
In addition to civil penalties, the US government can impose criminal liability on entities and individuals who wilfully violate US sanctions. As recently as 2018, criminal penalties have been levied on bank executives on the basis of their having conspired to evade US sanctions.
The toll of these cases extends beyond the significant penalties imposed; the highest settlement against a financial institution in the past five years totalled more than $963 million. Financial institutions must also generally expend significant resources in connection with investigating and addressing violations, including implementing improved compliance measures. And, of course, there are potential reputational costs based if identified as having violated US law.
In addition to the risk of violating the sanctions, non-US financial institutions must address risks associated with secondary sanctions. US secondary sanctions may be imposed on non-US persons when they engage in certain specified activities that, while outside of US jurisdiction, are contrary to US sanctions policy. The secondary sanctions do not make specific conduct illegal. Rather, the secondary sanctions identify conduct that is contrary to US foreign policy and identify ramifications of engaging in such conduct. For instance, a non-US financial institution found to have engaged in conduct specified in one of the secondary sanctions provisions could itself be designated as a Specially Designated National (SDN), such that all of its property and interests in property within the US, or in the possession or control of US persons wherever located, would be blocked. Such blocking would also apply to the property and interests in property of any other entity(ies) owned 50% or more by the designated party, to the extent such property or interests in property come within the US or the possession or control of US persons. Essentially, the financial institution and its subsidiaries would be cut off from the US financial market. Other sanctions that may be imposed against a financial institution include the imposition of restrictions on opening or maintaining US correspondent or “payable through” accounts, or denial of entry into the US for corporate officers of the sanctioned entity.
All secondary sanctions related to the US sanctions against Iran that had previously been suspended while the US participated in the Joint Comprehensive Plan of Action (JCPOA) were fully instituted again as of 4 November 2018. Several secondary sanctions triggers related to Iran, as well as Russia and North Korea, were included in the Countering America’s Adversaries Through Sanctions (CAATS) Act.
For financial institutions in Europe, these risks under US sanctions – both primary and secondary – must be addressed in light of the requirements under the EU Blocking Regulation. The regulation was originally introduced in 1996 in an attempt to counteract US sanctions in respect of Cuba. Following the 2018 announcement that the US would withdraw from the JCPOA and reimpose sanctions against Iran, the European Commission amended the Blocking Regulation to include the newly reimposed US sanctions. The EU Blocking Regulation has the following effects on EU financial institutions:
The EU Blocking Regulation therefore causes a further complication in the compliance strategies of financial institutions.
Keeping in mind that the enforcement actions and secondary sanctions risks under US sanctions extend beyond the US sanctions programmes involving Cuba and Iran, and in light of the significant risks created by enforcement of US primary sanctions and the possibility of secondary sanctions, it behoves financial institutions operating in Europe to factor this conflict of laws into their approach to compliance. From how sanctions compliance is addressed in the entity’s compliance programme, to the specific actions employees are trained to take and how information is communicated to customers, financial institutions must plan in advance. Some may opt to seek authorisation under the EU Blocking Regulation to permit conduct in compliance with the US sanctions. No matter the course taken with respect to the EU Blocking Regulation and the sanctions programmes impacted by it, continued attention to US sanctions risks is key for financial institutions in Europe and beyond.
This article was first published in Bryan Cave Leighton Paisner’s Emerging Themes in Financial Regulation 2019: New Perspectives publication – an extensive collection of articles around the themes of investigations, financial crime, digital, markets, supervision and governance. You can download the full publication here.