The bank and its parent company settled with OFAC for $862,318 for 98 voluntarily self-reported, non-egregious Apparent Violations of the Iran and Syria sanctions programs.
What they did
In early 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, the results of which Respondent voluntarily self- disclosed to OFAC. The apparent violations related to three categories of payments (“Apparent Violations”):
• Processing U.S. Dollar Payments for Individuals or Entities Located in Iran: From March 2, 2016 to December 5, 2018, 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. These transactions constituted an indirect exportation of financial services to Iran and caused U.S. financial institutions to export financial services to Iran, in apparent violation of §§ 560.203 and 560.204 of the Iranian Transactions and Sanctions Regulations, 31 CFR part 560 (ITSR).
• Processing U.S. Dollar Payments for Individuals or Entities Located in Syria: From July 15, 2016 to December 6, 2018, 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. These transactions constituted an indirect exportation of financial services to Syria and caused U.S. financial institutions to export financial services to Syria, in apparent violation of §§ 542.205 and 542.207 of the Syrian Sanctions Regulations, 31 CFR part 542 (SySR).
• Processing Euro-Denominated Payments to Iran as a Foreign Subsidiary of a U.S. Company: In June 2018, JC Flowers acquired a majority ownership interest in First Bank, making First Bank an entity majority-owned by a United States person and thus subject to the prohibitions of § 560.215 of the ITSR. Between October 17, 2018 and March 4, 2019, First Bank processed 28 Euro- denominated 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. Accordingly, these transactions constituted apparent violations of § 560.215 of the ITSR.
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 noted in underlying trade finance and shipping documents, or processing transactions that did not transit the United States but were processed while majority owned by a U.S. person.
How OFAC arrived at the final figure
The base penalty was a little more than double the final figure – $1,742,056.
OFAC determined the following to be aggravating factors:
(1) First Bank demonstrated a reckless disregard for U.S. sanctions regulations by failing to implement appropriate controls to comply with applicable U.S. regulations with respect to payments it processed (i) with a sanctions nexus that transited the U.S. financial system, or (ii) after the bank became a foreign subsidiary of a U.S. person. First Bank also 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.
(2) 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.
(3) First Bank conferred $3,589,189 in economic benefit to persons in Iran and Syria thereby causing harm to the integrity of the ITSR and SySR, respectively, and their associated policy objectives for at least three years.
OFAC determined the following to be mitigating factors:
(1) OFAC has not issued Respondent a Penalty Notice or Finding of Violation in the five years preceding the earliest date of the transactions giving rise to the Apparent Violations.
(2) Respondent cooperated with OFAC’s investigation into the Apparent Violations by conducting a historical lookback and by entering into a tolling agreement with OFAC.
(3) Respondent represented to OFAC that it undertook several remedial measures in response to the Apparent Violations, and following its change of ownership and the attendant enhanced commitment by JC Flowers & Co. to ensure compliance with the ITSR and SySR, including:
• First Bank has (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 has 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;
• As part of its agreement with OFAC, Respondent has undertaken to continue its implementation of these and other commitments.
And the takeaway?
This action highlights the importance of (i) foreign financial institutions understanding the scope of U.S. sanctions regulations on transactions processed via the U.S. financial system or within the United States, and (ii) U.S. companies conducting sanctions-related due diligence both before and after acquisitions, and to monitor newly acquired subsidiaries for OFAC compliance.
On that second point, while this underscores the emphasis on M&A placed in OFAC’s Framework document, First Bank’s negligence pales in comparison to other M&A-related cases – like Kollmorgen, Berkshire Hathaway, and Stanley Black & Decker.