Law360, New York (March 31, 2016, 10:29 AM ET) -- On March 16, 2016, the US Department of the Treasury’s Office of Foreign Assets Control issued a finding of violation to MasterCard International Inc. for violations of the Reporting, Procedures, and Penalties Regulations (RPPR), 31 C.F.R. Part 501. Specifically, OFAC determined that MasterCard failed to report accounts in which Bank Melli or Bank Saderat had an interest after OFAC added the two banks to the list of specially designated nationals and blocked persons (SDN list).
Following the May 1995 issuance of executive order 12959, which prohibited the export of goods, services (including financial services), and technology from the United States to Iran, MasterCard took steps to restrict accounts in which either Bank Melli or Bank Saderat had an interest. While it is not clear how MasterCard restricted the accounts, it seems noncontroversial that it did not formally "block" the accounts and file a blocked property report with OFAC since that was not required by the law at the time. These accounts became dormant, though the assets in the accounts remained with MasterCard.
On Oct. 25, 2007, OFAC added Bank Melli and Bank Saderat to the SDN list. (Bank Melli was added to the list pursuant to executive order 13382 of June 28, 2005, “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supports,” and Bank Saderat was added pursuant to executive order 13224, “Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism,” issued Sept. 23, 2001.) But MasterCard apparently failed to block the above-mentioned dormant accounts in which Bank Melli or Bank Saderat had an interest. It is possible that the long-standing restricted nature of these accounts may have contributed to MasterCard’s failure to block the accounts over 12 years later when the banks were designated.
As a result, MasterCard also failed to report the accounts to OFAC. Section 501.603 of the RPPR requires financial institutions to file a report with OFAC within 10 business days from the date that property becomes blocked, in addition to annual comprehensive reports to OFAC regarding all blocked property which form the basis of periodic reports that OFAC makes to Congress. Blocked funds must also be placed into an interest-bearing account from which only OFAC-authorized debits may be made.
OFAC did not find that MasterCard personnel had actual knowledge of the conduct that led to the violations; rather, OFAC determined that the company had reason to know that it maintained funds associated with two banks on the SDN list and should have identified and reported these dormant funds. In OFAC’s view, a finding of violation would most appropriately promote the compliance of large and sophisticated financial services companies like MasterCard with its reporting obligations.
In assessing the violation, OFAC considered the following aggravating factors, pursuant to 31 C.F.R. Part 501, Appendix A:
- MasterCard is a large and commercially sophisticated financial services company
- MasterCard’s failure to block and report the accounts to OFAC resulted in incomplete reports to Congress and responses to other inquiries related to blocked property, potentially undermining US government decision-making
- MasterCard’s failure to properly record interest on the accounts reduced the value of blocked assets available to the Congress and the president
- MasterCard’s OFAC compliance program appears to have lacked internal controls that would have prevented the violations, or later identified the company’s oversight
OFAC also considered the following mitigating factors:
- No MasterCard personnel, including managers or supervisors, appear to have had actual knowledge of the conduct that led to the violations
- Although the company failed to report the funds to OFAC, they never reached the sanctioned parties
- MasterCard has not received a penalty notice or finding of violation from OFAC relating to substantially similar violations in the five years preceding the date of the conduct giving rise to the violations
- MasterCard substantially cooperated with OFAC’s investigation, including by voluntarily self-disclosing the violations to OFAC and by executing a statute of limitations tolling agreement and an extension to the agreement
OFAC’s enforcement action against MasterCard highlights the significant US government interests in remaining informed about blocked property and having access to the full value of blocked funds. This may take on particular significance as the US government unblocks certain funds as part of its implementation of the Joint Comprehensive Plan of Action (JCPOA) agreement. (Pursuant to the JCPOA, OFAC has removed Bank Melli from the SDN list, although Bank Saderat remains listed.)
Additionally, the US government may be concerned that failure to report and place blocked funds in interest-bearing accounts will reduce the value of assets available for disbursement to victims of Iranian-sponsored terrorism and their families, who hold billions of dollars in judgments against Iran. This issue is especially pertinent considering the pending litigation in Bank Markazi v. Peterson, in which American victims of Iranian-sponsored terrorism in the Middle East are seeking $1.75 billion in blocked assets of Bank Markazi, the Central Bank of Iran, to enforce their judgment against the Iranian government. The US Supreme Court heard oral arguments in January 2016 on whether the Iran Threat Reduction and Syria Human Rights Act of 2012, which allowed the victims’ families to seize the bank’s assets, violated the separation of powers.
The importance of ensuring adequate compliance programs for identifying blocked accounts, funds, and property or interest in property following designations of SDNs cannot be understated. Without adequate safeguards, financial institutions risk an OFAC enforcement action upon failure to report and place blocked property in interest-bearing accounts.