Law360, New York (December 3, 2015, 10:50 AM ET) -- On Nov. 4, 2015, the Office of Foreign Assets Controls of the US Department of the Treasury announced that Banco do Brasil SA, 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 Internacional Importadora Ltda — Isfahan is a location in Iran — that was a customer of a Brazilian affiliate, Banco do Brasil SA, 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 BB 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 BB 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 (unnamed) 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 intermediary financial institution apparently rejected the 2011 transaction and returned the funds to BBNY “due to Iran involvement.”
- 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. However, BBNY compliance personnel ultimately cleared them 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 nonegregious case. It appears that OFAC based the penalty on a theory of liability that BBNY exported a service related to trade with Iran that was prohibited under the ITSR.
Financial institutions may process thousands of transactions a year. In this settlement, seven alleged transfers totaling less than $200,000 over about a two year period resulted in liability. Why did this happen?
US compliance personnel at BBNY may have been put in an awkward position based on communications with BB. Nonetheless, it appears that BBNY relied on oral discussions with personnel at BB when adding the customer to the Good Guy exception list. There should have been a process to manage what kind of information and rationale was required by BBNY to justify a party’s inclusion on the list. It does not appear that there were any documents that BBNY could furnish to OFAC showing that the customer did not conduct business with Iran, or that BB had provided any written assurances regarding the transaction’s background. Once the customer was approved through an initial “gate” review by being added to the exclusion list, there was no mechanism to stop and review subsequent suspect transactions, particularly when the transfers were being routed for a third-country beneficiary’s account.
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, including those that did not involve exports to or imports from the United States. Of course, BBNY was responsible for determining that it was not exporting a service, directly or indirectly, to Iran before processing the wire transactions on behalf of BB’s customer.
Based on the circumstances alleged, the transactions should have been stopped pending enhanced internal review or investigation. In particular, a US intermediary financial institution inquired about the 2011 wire transfer, requesting copies of any related invoices associated with the payment. BBNY did obtain some documentation about the transaction, but its legibility was of poor quality. BBNY apparently did not request additional invoices or associated information about the transfer — originating from the customer’s account at BB and destined for a third-country beneficiary’s account at a third-country financial institution — which could have been used to determine whether the transfer involved trade of Iran. As above, BBNY apparently did not have a documented record to show that it acted reasonably in processing this transfer, and thus did not undertake enhanced due diligence for the transaction after questions had been raised.
It seems likely that the US intermediary financial institution reported the rejection of the transfer to OFAC, even though the enforcement information is silent on this point. However, no further review was undertaken when BBNY processed subsequent transactions on behalf of the same customer. As a consequence, financial institutions would be well advised to consider investigating compliance with US sanctions laws and regulations when a third party rejects or suspends transactions, and if the circumstances warrant, voluntary disclosing information to OFAC for current transfers and historical undertakings.
The execution of sanctions compliance is a risk-based exercise. This case underscores the need to conduct robust US sanctions due diligence that is supported by internal record keeping, especially when a potential red flag has been raised and/or a report could be generated to OFAC. Based on the lack of records associated with processing the transactions, it appears that BBNY could not show that it acted reasonably based on the circumstances presented, and as a result, a violation of the ITSR occurred.