While major enforcement actions against foreign banks for U.S. sanctions violations appear to have ebbed over the past three years, the recent settlement of sanctions-related claims, which included imposition of $1.34 billion in forfeitures and penalties, against a large foreign bank is a reminder that federal and state authorities continue to aggressively monitor compliance with, and enforce, U.S. sanctions laws. With the issuance of new sanctions regimes relating to Russia in April 2018 and the “snap-back” of secondary sanctions against Iran last November, the pace and magnitude of U.S. sanctions enforcement actions against foreign banks lacking robust, updated compliance programs will likely increase.
Overview of the Case
On November 18, 2018, Societe Generale S.A. (SG or the Bank), a Paris-based bank, entered into a global settlement to pay $1.34 billion in combined penalties and forfeitures to federal and state authorities primarily for violations of U.S. sanctions laws pertaining to Cuba, Iran and Sudan. It represents the largest U.S. sanctions settlement in 2018 and the second-largest sanctions payment for any financial institution since BNP Paribas’ global settlement of $8.9 billion in June 2014.
The global settlement is captured in a deferred prosecution agreement (DPA) with the Office of the United States Attorney for the Southern District of New York, obligating the bank to forfeit $717.2 million to the United States and pay monetary penalties in the amount of $162.8 million to the New York County District Attorney’s Office, $53.9 million to the Office of Foreign Assets Control (OFAC) of the Department of the Treasury, approximately $81.27 million to the Federal Reserve, and $325 million to the New York State Department of Financial Services (NY DFS).
The Statement of Facts filed in connection with the DPA states that, from at least 2004 through 2010, SG engaged in more than 2,500 transactions through financial institutions located in the County of New York, valued at close to $13 billion, in violation of the Cuban Assets Control Regulations (31 C.F.R., Part 515). SG also engaged in $22.8 million in transactions with a sanctioned Sudanese entity in violation of the Sudanese Sanctions Regulations (31 C.F.R., Part 538), and with other sanctioned entities in violation of the Iranian Transactions and Sanctions Regulations (31 C.F.R., Part 560). A separate settlement with the NY DFS also resolves persistent deficiencies with the SG New York Branch’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program.
Within the DPA, SG consented to the filing of an information and stipulated to facts establishing that it conspired to violate the Trading with the Enemy Act (TWEA) and the Cuban Assets Control Regulations promulgated thereunder. The Bank’s detailed admissions acknowledge that between 2004 and 2010, it knowingly violated U.S. and New York State laws by sending payments through the U.S. financial system, which violated U.S. sanctions laws, causing other U.S. financial institutions to process transactions that otherwise should not have been processed, pursuant to OFAC regulations governing sanctions against Cuba. SG operated numerous credit facilities that provided significant funding to Cuban banks and entities, and to foreign corporations conducting business in Cuba, including a Dutch commodities trading firm and a Cuban corporation with a state monopoly on the production and refining of crude oil in Cuba. The payments cleared through U.S. financial institutions but went undetected due to SG’s “concealment practice,” by which it made inaccurate or incomplete notations on payment messages that accompanied the transactions. In one example, an SG manager in the Bank’s Natural Resources and Energy Financing Department sent instructions directing that “the USD transfer must not in any case mention the name of the ordering party [a joint venture between a French company and Cuban government entity] or its country of origin, Cuba. The clearing will indeed be carried out in NY.” In another example, a senior Group Compliance employee directed IT employees to use internal filtering systems—normally designed to identify and prevent transactions with sanctioned entities—to “repair” the transactions so that they did not identify a sanctioned entity. In a third example, a Bank manager advised in a memo that “FOR ANY TRANSFER OF FUNDS IN USD FOR WHICH THE BENEFICIARY OR THE BANK HOUSING THE PAYMENTS IS CUBAN, A SPECIFIC PROCEDURE IS IN PLACE: … Arrange a cash transfer in the amount SG requests…without reference of the end Cuban beneficiary.”
SG decided to wind down its U.S. dollar transactions for Cuban Credit Facilities in 2004, but admitted that it allowed the practice to continue for six more years until 2010, during which time SG conducted 1,921 USD transactions that violated the TWEA and the Cuban regulations, with a total value exceeding $10 billion. Only after an investigation was triggered by the blocking of SG-processed transactions involving a Sudanese sanctioned entity by other U.S. financial institutions in March 2012 did the scheme begin to come into focus. That event led to SG’s limited voluntary disclosure in 2013 and subsequent discussions with law enforcement and regulatory agencies, ultimately requiring SG to undertake a broader scope investigation. That detailed forensic analysis led to SG’s “belated” disclosure, in October 2014, of the full nature of its unlawful conduct.
Notably, SG ultimately cooperated substantially with the investigation and engaged in significant remediation efforts, including by creating a central Group Sanctions Compliance function, increasing its Group Compliance personnel between 2009 and 2017 from 169 to 785 employees, enhancing compliance IT, more than tripling its overall compliance budget and instituting biannual sanctions training.
While there has been a downward trend in the number of sanctions-related enforcement actions during the present administration, the SG settlement should be seen not as a shift in enforcement strategy but rather as a continuation of prior administrations’ enforcement efforts going back a number of years. Such cases take years to develop, and SG’s is no exception. Most of the violations at issue occurred between six and 11 years ago, which shows that major sanctions enforcement cases can take years to bring to resolution.
The offending practices that ensnared SG are also unsurprisingly similar to those employed by other large foreign financial institutions that processed large volumes of U.S. dollar payments abroad through U.S. correspondent accounts or branches located in the U.S. around the same period of time. A common method of skirting U.S. sanctions laws involved “stripping” sanctioned country information from SWIFT messages and other wire instructions to mask the illicit origin of U.S. dollar payments. “Stripping” was employed by Commerzbank as reported in its $258 million settlement with OFAC in 2015, by BNP as reported in its criminal sentencing in 2014, by Royal Bank of Scotland as reported in its $100 million settlement in 2013, and by Standard Chartered as reported in its $667 million resolution in 2012.
As the wave of prosecutions and settlements for major U.S. sanctions violations that occurred from the mid-2000s to early 2010s appears to be tailing off, what, going forward, should financial institutions expect will be likely areas of focus in sanctions enforcement? The Trump administration’s re-imposition of secondary sanctions against Iran effective November 4, 2018, are likely to be a focus of U.S. authorities as foreign financial and nonfinancial institutions continue to engage in U.S. dollar transactions with Iran. The sanctions imposed in April 2018 against certain Russian businessmen, related businesses and senior Russian government officials are also likely to generate close interest in enforcement given the interconnected nature of these businesses to the U.S. economy, particularly in the aluminum industry.
As these and other new sanctions regimes continue to be rolled out over the course of 2019, it is critical that foreign financial and nonfinancial institutions be particularly vigilant in updating their U.S. sanctions compliance functions, and engage in regular reassessments of their risk profile to ensure they have appropriately mitigated the risk of major U.S. sanctions violations.