For the first time in its history, the Office of Foreign Assets Control (OFAC) of the U.S. Treasury Department recently designated a bank under the Kingpin Act. The unprecedented designation of the Honduran bank, Banco Continental S.A., on Oct. 7, 2015, means that transactions with Banco Continental are prohibited by U.S. persons, and create compliance risks even for non-U.S. persons. The designation of Banco Continental is further evidence of U.S. regulators’ increasing enforcement activity, and businesses should carefully review their current compliance programs and assess any relationships with designated entities to minimize the risk of even inadvertent dealings with sanctioned entities and individuals.
Notably, in a coordinated enforcement effort certain owners of Banco Continental were also designated by OFAC, and charged in federal court in New York for money-laundering allegations. One owner’s family member was arrested in Miami.
As a result of the OFAC designations, all property or interests in property of Banco Continental, which is located in the United States or in the possession or control of U.S. person, or comes within the United States (such as in-bound funds transfers) is “blocked.” As a practical matter, such property is frozen in place and generally cannot be sold, disposed of, or transferred without prior approval from OFAC.
Only days after OFAC’s designation, the government of Honduras initiated liquidation proceedings against Banco Continental. The bank is now under control of the government of Honduras and is being managed by a government-appointed liquidator. It remains to be seen whether the Honduran government has or will launch its own investigation against the Bank and its owners.
According to OFAC, Banco Continental and related entities and individuals were designated for allegedly playing a significant role in international narcotics trafficking, specifically money laundering and other services that support international narcotics trafficking activities. The entities and individuals designated can be found in the U.S. Department of Treasury’s website.
The Kingpin Act is a U.S. law that gives OFAC the power to “designate” individuals and entities that OFAC finds have materially assisted or supported international narcotics trafficking activities; or are owned, controlled, directed by, or act for or on behalf of, a specially designated narcotics trafficker; or played a significant role in international narcotics trafficking. A designated individual or entity is placed on the Kingpin list. Any property or interests in property of the individuals or entities on the Kingpin list that is located in the U.S. or in the possession or control of U.S. person is “blocked.” As a practical matter, such property is frozen in place and generally cannot be sold, disposed of, or transferred without prior approval from OFAC.
Under the Kingpin Act and other sanctions programs, U.S. persons are prohibited from dealings with designated individuals and entities, who are specifically named on OFAC’s list of Specially Designated Nationals. More challenging from a compliance standpoint, however, U.S. persons are likewise prohibited from dealings with entities owned 50 percent or more by any designated entities or individuals (in the aggregate), who are not necessarily enumerated in OFAC’s SDN List.
While U.S. entities must remain vigilant and implement effective sanctions compliance programs, even non-U.S. entities may run afoul of OFAC sanctions. In particular, to the extent non-U.S. entities avail themselves of U.S. mail or financial systems, or engage in U.S. dollar transactions that clear through the U.S. banking system, OFAC may assert jurisdiction and initiate enforcement actions. Indeed, the majority of significant high dollar value OFAC enforcement settlement cases have been levied against non-U.S. financial institutions found to be engaging in transactions related to U.S.-sanctioned countries, individuals, or entities that involved U.S. dollar transactions or U.S. correspondent accounts.
Individuals and entities that have business dealings with the recently designated Kingpin Act entities and individuals should carefully review their relationships and assess the potential risk for future interactions or transactions. Although the Kingpin Act designation does not bar all transactions and generally addresses only assets or transactions in the U.S. or in the possession or control of U.S. persons, a violation of the Kingpin Act can result in both criminal and civil enforcement in the U.S. Additionally, entities or individuals who are deemed to be providing material support to any designated individuals or entities, run the risks themselves of becoming the target of U.S. sanctions. If the Banco Continental case is any example, in extreme cases that could spell the end of normal business operations.