Why it matters

Swiss-based UBS AG's agreement to pay more than $1.7 million to the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) underscores the scope of OFAC sanctions and the complications in coordinating compliance with sanctions imposed by multiple jurisdictions. OFAC administers laws, regulations and executive orders. In this case the bank continued to engage in investment-related activity on behalf of the client after the client had been added to the so-called OFAC list, and the bank had ceased providing other banking services to comply with Swiss sanctions. Although UBS had self-identified the offending securities-related transactions with the sanctioned individual, OFAC did not consider the disclosure to be a voluntary self-disclosure under the agency's enforcement guidelines, as the transactions were substantially similar to another apparent violation of which OFAC was already aware. However, because the violations were "nonegregious" and several other mitigating factors were present, the base penalty of almost $3.8 million was substantially reduced.

Detailed discussion

The $1.7 million deal between OFAC and Swiss-based UBS AG settled over allegations that the financial institution violated the Global Terrorism Sanctions Regulations by providing investment-related services to a bank client. According to OFAC, between January 2008 and January 2013, UBS processed 222 securities-related transactions for a client whose name appeared on OFAC's Specially Designated Nationals (SDN) and Blocked Persons Lists.

UBS had originally opened accounts in 1993 and 1994 for the client (who was unnamed due to Swiss privacy laws). The accounts, denominated in different currencies including U.S. dollars, were used to engage in a variety of investments in different markets. OFAC added the client to the SDN list in 2001 around the same time other jurisdictions and entities—including Switzerland, the United Kingdom, the European Union and the United Nations—imposed sanctions on him or her.

To comply with the Swiss restrictions imposed in 2001, UBS placed blocks and other restrictions on the client's accounts to prevent the client from withdrawing or transferring funds outside the financial institution. However, UBS continued to engage in investment-related activities on behalf of the client, including processing "purchases of U.S. securities, sales of U.S. securities, the receipt of dividends on U.S. securities, and capital calls, management fees, and cash distributions in connection with a U.S. private equity investment."

OFAC noted that UBS had a global OFAC policy in place during this time period requiring the bank to screen both incoming and outgoing transfers. But because the securities-related transactions did not involve external parties, the bank considered them to be internal transfers, and thus the transaction monitoring system did not generate any alerts. When the bank conducted a review of the client relationship in 2012 and decided to terminate the relationship, closing accounts and liquidating positions including the U.S.-based securities, the sanctions filter generated alerts based on the client's presence on OFAC's SDN.

OFAC determined that the violations were not egregious, but in the absence of voluntary disclosure, the total base penalty for such nonegregious violations was $3,778,000.

To determine the final civil money penalty, OFAC considered several aggravating factors, including UBS' "reckless disregard" for U.S. sanctions requirements as well as the fact that multiple business lines and personnel—including supervisory and management staff within the compliance department—had actual knowledge of the 222 transactions conducted for or on behalf of the client in the amount of $2,466,195.01.

However, OFAC also considered four mitigating factors: UBS had not received a penalty notice or finding of violation for five years preceding the client's securities transactions; the bank had a global sanctions policy in place requiring compliance with OFAC's sanctions programs; UBS took remedial action regarding the apparent violations; and the bank "substantially cooperated" with OFAC during its investigation.

To read OFAC's press release about the enforcement action, click here.