On November 4, 2015, the Office of Foreign Assets Controls (OFAC) of the US Department of the Treasury announced that Banco do Brasil, S.A., New York Branch (BBNY) has agreed to pay $139,500 to settle civil charges related to the US sanctions program against Iran under the Iranian Transactions and Sanctions Regulations (ITSR). Important lessons may be learned based on the allegations in OFAC’s Enforcement Information, including:
- In 2010, BBNY manually entered an entity named Isfahan – a location in Iran – that was a customer of a Brazilian affiliate to a so-called “Good Guy Exception List” after it was flagged by sanctions screening processes. Even though it is not exactly clear why or how this exception list was compiled, it appeared that BBNY relied on “verbal representations” from an affiliated entity in Brazil that the customer did not export products to or import goods from Iran.
- Later that year, BBNY processed three fund transfers, originating from the customer’s account in Brazil and destined for a third country’s beneficiary account at other financial institutions. These transactions were not stopped due to inclusion on the “Good Guy” list, even though OFAC asserts BBNY later determined that these fund transfers partially involved Iranian-origin goods. This suggests that the representations from Brazil may have been incorrect or misunderstood by BBNY.
- In 2011, a similar transaction occurred based on the reasons discussed in the preceding point. However, a separate US intermediary financial institution requested documentary information from BBNY, which in turn requested records from Brazil. The records obtained from Brazil were “of poor quality.” Nonetheless, without requesting more legible information and relying on the prior verbal representations from Brazil, BBNY determined that the invoice did not reference Iran and relayed this information to the US intermediary financial institution.
- This US institution apparently rejected the transaction and returned the funds to BBNY “due to Iran involvement.” It seems likely that the US institution reported the rejection to OFAC, even though the Enforcement Information is silent on this point.
- Later that year and again in 2012, BBNY cleared additional transfers that involved the same customer. One transaction was automatically cleared due to inclusion on the “Good Guy” list. Others were flagged and reviewed due to a change in address but were cleared by compliance personnel based on “investigation results” related to the 2011 transaction or because only the word “Isfahan” was referenced. No additional information was sought from Brazil by BBNY compliance personnel, even though the transactions allegedly did involve Iranian-origin goods.
- OFAC’s aggravating factors suggest that BBNY personnel (including in the compliance department) did not exercise reasonable due diligence to obtain additional records or information when adding the Brazilian customer to the exclusion list or after BBNY’s and a third party financial institution’s transaction screening flagged the transfers.
- BBNY did not voluntarily self-disclose the apparent violations, even though OFAC determined that the apparent violations were a non-egregious case, which presumably was based on a theory of liability that BBNY exported a service related to trade with Iran that was prohibited under the ITSR.
Although financial institutions may process thousands of transactions, seven alleged transfers totaling less than $200,000 over about a two year period resulted in liability here. US compliance personnel may have been put in an awkward position based on communications from the parent operations in Brazil. Furthermore, it is not clear from the Enforcement Information that the Brazilian operations knew that it may have been putting its US operations at risk when requesting that the transfers be processed for the customer. Based on the circumstances alleged, the transactions should have been stopped pending enhanced internal review or investigation. This case underscores the need to conduct robust US sanctions due diligence that is supported by internal recordkeeping, especially when a potential red flag has been raised and/or a report could be generated to OFAC.