New Sanctions Targeting Persons in Venezuela and Expansion of Sanctions Addressing the Situation in Ukraine; DOJ Reaches First Criminal Settlement in “Operation Choke Point”; and FinCEN Proposes Special Measures Against an Andorran Bank Under Section 311 of the USA PATRIOT Act SUMMARY Last week, there were several important developments in the areas of U.S. Bank Secrecy Act/anti-money laundering (“BSA/AML”) and U.S. economic sanctions. On Monday, March 9, 2015, the President issued Executive Order 13692, implementing, for the first time, sanctions under the Venezuela Defense of Human Rights and Civil Society Act of 2014. On Wednesday, March 11, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced the expansion of the list of parties targeted by the Ukraine/Russia-related economic sanctions, following similar actions taken by the European Union and Canada in February, including the targeting of a party for operating in the Crimea region of Ukraine for the first time under the authority of Executive Order 13685. On Tuesday, March 10, 2015, the U.S. Department of Justice (“DOJ”) announced its first criminal settlement related to “Operation Choke Point”—an enforcement initiative targeting banks and payment processors that provide services to merchants in high risk industries. This criminal settlement appears to reflect a marked increase in the potential severity of sanctions stemming from misconduct uncovered through that initiative. On that same day, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) named Banca Privada d’Andorrà (“BPA”) as a foreign financial institution of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act and issued a notice of proposed rulemaking (“Proposed Rule”) with regard to the imposition of special measures against BPA. If the Proposed Rule is adopted, covered U.S. financial institutions would be -2- Recent Developments in BSA/AML and Sanctions March 18, 2015 prohibited from maintaining correspondent accounts for BPA and would be required to apply special due diligence to correspondent accounts held for other foreign banks to guard against the processing of any transactions involving BPA or any of its branches, offices and subsidiaries. Treasury’s finding of primary money laundering concern, however, is effective immediately. In addition, on Thursday, March 12, Commerzbank AG agreed to a $1.45 billion settlement with the DOJ, OFAC and the Board of Governors of the Federal Reserve System for sanctions and BSA violations. The Commerzbank matter will be the subject of a separate memorandum to clients. VENEZUELA SANCTIONS On March 9, 2015, President Obama issued E.O. 13692 targeting for sanctions persons found to be responsible for or complicit in, or to be responsible for ordering, controlling or otherwise directing, or to have participated in, directly or indirectly, any of the following in or in relation to Venezuela: actions or policies that undermine democratic processes or institutions; significant acts of violence or conduct that constitute a serious abuse or violation of human rights, including against persons involved in antigovernment protests in Venezuela in or since February 2014; actions that prohibit, limit or penalize the exercise of freedom of expression or peaceful assembly; or public corruption by senior officials within the Government of Venezuela. The E.O. also targets, among others, persons identified to be current or former leaders of an entity that has, or whose members have, engaged in any of the activities described above, or current or former officials of the Government of Venezuela.1 The E.O. also suspends the entry into the United States of individuals meeting the criteria for sanctions, with limited exceptions. The E.O. implements the Venezuela Defense of Human Rights and Civil Society Act of 2014, which the President signed into law on December 18, 2014,2 but is also issued under other authorities, including the International Emergency Economic Powers Act (“IEEPA”), and goes beyond the requirements of the Venezuela-specific legislation. In the E.O., seven individuals were identified as sanctioned parties under the new authority, and those seven have been added to OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”) under the tag “[Venezuela].” Absent an applicable exception or license, it is now unlawful for any U.S. person3 (including any U.S. branch or agency of a non-U.S. bank) to do business with those individuals, and any property that is in the United States or within the possession or control of a U.S. person in which any designated person has an interest must be blocked. The effect of the designation is an across-the-board prohibition against transfers or dealings of any kind with those individuals and with regard to such property. This generally means that U.S. persons are prohibited from providing funds, goods or services to or for the benefit of any designated person and from receiving any funds, goods or services from any designated person. Additional persons or entities found to meet the criteria described above may be designated under the authority of this E.O. in the future. -3- Recent Developments in BSA/AML and Sanctions March 18, 2015 ADDITIONAL DESIGNATIONS IN RELATION TO THE SITUATION IN UKRAINE On March 11, 2015, OFAC, under the authority of E.O. 13660,4 designated eight Ukrainian separatists and one pro-separatist Russian entity and three of its leaders “for being responsible for or complicit in actions or policies that threaten the peace, security, stability, sovereignty, or territorial integrity of Ukraine, for being leaders of such entities, or for asserting government authority over a part or region of Ukraine without the authorization of the Government of Ukraine.” Additionally, OFAC, under the authority of E.O. 13660, designated three individuals for the “misappropriation of state assets of Ukraine.” Finally, invoking the authority of E.O. 136855 for the first time, one bank, Russian National Commercial Bank (“RNCB”), was designated for operating in the Crimea region of Ukraine. According to OFAC’s press release,6 “RNCB had no presence in the Crimea region of Ukraine prior to its occupation and attempted annexation by Russia and Russian authorities have used the bank to facilitate its illegal efforts to incorporate Crimea into the Russian Federation. Following the annexation, RNCB bought or took over branches of retreating banks and now operates the largest banking network in Crimea.”7 OFAC indicated that these designations follow similar action taken by the European Union and Canada in February. The European Union issued a notice that it sought to maintain sanctions against 16 individuals and to provide a new statement of reasons given for each person.8 Canada imposed economic sanctions and travel bans on a number of Russian and Ukrainian individuals and entities.9 Acting Under Secretary for Terrorism and Financial Intelligence Adam J. Szubin stated that “[f]rom the start of this crisis, we have demonstrated that we will impose costs on those who violate the sovereignty and territorial integrity of Ukraine. That includes individuals, organizations, businesses, and the governments that support them.” Mr. Szubin further stated that “[i]f Russia continues to support destabilizing activity in Ukraine and violate the Minsk agreements and implementation plan, the already substantial costs it faces will continue to rise.”10 The individuals and entities targeted by the March 11 designations have been added to OFAC’s SDN List under the tags “[UKRAINE-EO13660]” and “[UKRAINE-EO13685].” The consequence of these designations is that U.S. persons are restricted in their dealings with the targeted persons and must block assets that come into their possession or control, similar to the restrictions and prohibitions described above with regard to the Venezuela sanctions. “OPERATION CHOKE POINT”—COMMERCEWEST BANK SETTLEMENT In March 2013, the DOJ announced an initiative to stop banks and payment processors from providing financial services to merchants that were suspected of consumer fraud. The DOJ initiative, known informally as “Operation Choke Point,” is “focused on banks and payment processors because these -4- Recent Developments in BSA/AML and Sanctions March 18, 2015 institutions are the ‘so-called bottlenecks, or choke-points,’ for financing merchants from ‘high-risk’ industries.”11 On March 10, 2015, the DOJ entered into a civil and criminal settlement with CommerceWest Bank (“CommerceWest”), resolving a consumer fraud investigation focused on the Irvine, California bank’s relationship with a third-party payment processor (“TPPP”). The DOJ alleged that CommerceWest engaged in wire fraud by knowingly permitting a TPPP to make over 1.3 million unauthorized withdrawals for “tens of millions of dollars” from consumer accounts, and failed to file suspicious activity reports (“SARs”) with respect to the TPPP’s conduct, as required by the Bank Secrecy Act (“BSA”). The settlement includes a $4.9 million monetary resolution, a deferred prosecution agreement (“DPA”) in which CommerceWest admitted to a willful violation of the BSA, and a permanent injunction requiring reforms to CommerceWest’s fraud detection and prevention practices relating to TPPPs and certain merchants. The DOJ’s civil action, brought under the Anti-Fraud Injunction Act and Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”),12 alleges that from December 2011 through July 2013, CommerceWest ignored clear warning signs that a TPPP named V Internet Corp LLC (“V Internet”) utilized remotely-created checks (“RCCs”)—checks that are created by a third party using the account holder’s name and bank account information—to fraudulently debit the accounts of thousands of consumers. According to the DOJ, CommerceWest ignored a “parade of red flags” indicating that V Internet was defrauding consumers. These red flags included: A returned transaction rate for RCCs created by V Internet of over 50%; A high number of returned RCCs accompanied by a sworn affidavit by the account holder that the debit was not authorized; A high number of RCCs returned because the account to be debited did not exist; Thousands of complaints from consumers;13 Numerous letters and calls from other banks complaining of fraud and warning CommerceWest of unauthorized RCCs from their customers’ accounts;14 and Allegations by V Internet’s own employees that V Internet’s owner had stolen money by knowingly submitting thousands of duplicate RCCs. The DOJ alleges that CommerceWest continued to process transactions for V Internet despite being aware of these red flags, and generated over $5 million in fees in doing so. To settle the civil complaint, CommerceWest agreed, without admitting liability, to pay $2 million in civil money penalties, to hire outside counsel to conduct an internal investigation of the allegations in the civil complaint and make recommendations to the bank’s Board of Directors, and to significant restrictions -5- Recent Developments in BSA/AML and Sanctions March 18, 2015 designed to prevent future consumer fraud by TPPPs at CommerceWest. Among other things, the restrictions permanently prohibit CommerceWest from: delegating to a TPPP responsibility to conduct due diligence and monitoring of the TPPP’s merchants; as an originating depository financial institution,15 accepting an RCC or other remotely-created payment order in connection with telemarketing or Internet-based businesses absent prior authorization from the U.S. government; providing ACH services, access or processing to any merchant engaged in telemarketing or Internetbased business, directly or through a TPPP, unless the bank has conducted extensive diligence, as detailed in the settlement agreement; and providing any bank accounts or services to a TPPP unless the TPPP is properly licensed and registered. Simultaneously, CommerceWest entered a DPA which defers for two years federal criminal charges that CommerceWest violated the BSA by failing to file SARs on V Internet’s activities despite the red flags described above. In addition to agreeing that the failure was “willful” and forfeiting $2.9 million seized from accounts at the bank, CommerceWest was required to admit responsibility for the acts charged and the truthfulness of the allegations and agree that it would make no public statements to the contrary. However, the DPA provides that CommerceWest reserves the right to contest the applicability of the factual allegations in the DPA to a specific, private civil litigant or class of private litigants. Interestingly, neither FinCEN, which implements and enforces the BSA and associated regulations, nor the bank’s federal or state regulator, which examine the bank for BSA compliance, took enforcement action in conjunction with the DOJ. The DOJ’s actions against CommerceWest appear to reflect a marked increase in the severity of potential sanctions stemming from misconduct uncovered through “Operation Choke Point.” The DOJ’s first “Operation Choke Point” case against Four Oaks Bank & Trust Company (“Four Oaks”) was resolved in April 2014 through a civil settlement under the Anti-Fraud Injunction Statute and FIRREA.16 Although the DOJ’s complaint against Four Oaks referenced the BSA, the action was premised exclusively on the defrauding of consumers (wire fraud). Wire fraud is a predicate offense for a FIRREA action, which has a lesser burden of proof than a criminal action for wire fraud. BSA violations, in contrast, are not a predicate offense for a FIRREA action and can be pursued by the DOJ either civilly or criminally. For a criminal violation, the government need only show that a person willfully failed to file a SAR. Under its settlement with the DOJ, Four Oaks—a bank roughly double the size of CommerceWest— agreed to $1.2 million in monetary sanctions and to restrictions and prohibitions similar to those imposed on CommerceWest with respect to TPPPs. Four Oaks was not required to admit to wrongdoing. CommerceWest, in contrast, agreed to approximately four times that amount in monetary sanctions as well as extensive restrictions and prohibitions related to TPPPs, and was required to admit to criminal wrongdoing.17 -6- Recent Developments in BSA/AML and Sanctions March 18, 2015 PROPOSED RULE IMPOSING SECTION 311 SPECIAL MEASURES AGAINST BANCA PRIVADA D’ANDORRÁ On March 10, 2015, FinCEN issued a Proposed Rule that would, if adopted, impose special measures against BPA as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act.18 Treasury’s finding of BPA as a financial institution of primary money laundering concern, however, is effective immediately. The proposed designation is based primarily on FinCEN’s finding that, “for several years, high-level managers of BPA have knowingly facilitated transactions on behalf of thirdparty money launderers acting on behalf of transnational criminal organizations.”19 Section 311 of the USA PATRIOT Act empowers FinCEN, by delegation from the U.S. Secretary of the Treasury, to take one or more of five “special measures” against foreign jurisdictions, foreign financial institutions, classes of international transactions or types of accounts of primary money laundering concern. In the Proposed Rule, FinCEN is seeking to impose the fifth special measure,20 which would prohibit banks and other covered financial institutions21 from establishing, maintaining, administering or managing correspondent accounts22 in the United States for or on behalf of BPA, defined to include all of BPA’s domestic and international branches, offices and subsidiaries, wherever located (“BPA Group”). The Proposed Rule would require that covered financial institutions apply “special due diligence” to their respective foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving BPA Group. The special due diligence would, at a minimum, include: a one-time notification to each of the covered financial institution’s foreign correspondent account holders that the covered financial institution “knows or has reason to know” provides services to BPA Group, that the foreign correspondent account holder may not provide BPA Group with access to the correspondent account maintained at the covered financial institution;23 and reasonable steps to identify any use of its foreign correspondent accounts by BPA Group. Covered financial institutions would be required to take “a risk-based approach” when deciding what, if any, other due diligence measures it “reasonably must adopt” to guard against the use of its foreign bank correspondent accounts to process transactions involving BPA Group. FinCEN specifically requested comment on this last requirement. In the Preamble to the Proposed Rule, FinCEN expresses concern that BPA Group may attempt to disguise its transactions by not explicitly identifying BPA Group as an involved party in a transaction. Under the Proposed Rule, if a covered financial institution obtains knowledge that a correspondent account is being used to process transactions involving BPA Group, the covered financial institution would be obligated to take all appropriate steps to prevent such access, including notifying its correspondent account holder and, where necessary, terminating the correspondent account. Although the Proposed Rule has no binding effect on covered financial institutions, the Proposed Rule, particularly when coupled with the Notice of Finding, puts covered financial institutions on notice that BPA -7- Recent Developments in BSA/AML and Sanctions March 18, 2015 is a cause for money laundering concern. The comment period on the Proposed Rule expires on May 12, 2015. Additional discussion concerning 2014 BSA/AML-related enforcement and sanctions developments and enforcement may be found in our previous memorandum to clients entitled “2014 Year-End Review of U.S. BSA/AML and Sanctions Developments and Their Importance to Financial Institutions,” available here. Clients interested in further information concerning these matters are encouraged to contact the Sullivan & Cromwell lawyers identified at the end of this memorandum.