On December 11, 2013, the Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Board of Governors of the Federal Reserve System (the Federal Reserve) and the New York State Department of Financial Services (NYDFS) each concluded regulatory actions against Royal Bank of Scotland Group plc (RBS or the Bank), based in the United Kingdom. The cases arose out of alleged conduct by RBS and its affiliates that may have violated US economic sanctions against Iran, Burma, Sudan, and Cuba. In concluding these civil settlements, RBS agreed to pay a total of $100 million in monetary sanctions: $50 million each to the Federal Reserve and NYDFS (with the OFAC settlement encompassing the $50 million payable to the Federal Reserve). The Bank also took substantial remedial action and agreed to implement a robust sanctions compliance program.
The RBS settlements demonstrate that federal and state regulators in the United States remain focused on economic sanctions laws, particularly against foreign financial institutions that allegedly engaged in deceptive activities while processing payments related to countries or entities subject to US economic sanctions. See our earlier advisories on Lloyds TSB Bank plc (January 2009), Credit Suisse AG (December 2009), ING Bank, N.V. (June 2012), Standard Chartered Bank (NYDFS - August 2012), HSBC, Standard Chartered Bank and Bank of Tokyo-Mitsubishi UFJ, Ltd. (December 2012) and Bank of Tokyo Mitsubishi-UFJ, Ltd. (NYDFS - June 2013).
The cases against RBS and the other major foreign banks have involved similar alleged conduct. In particular, RBS personnel located outside the United States apparently engaged in intentional stripping of identifying information regarding sanctioned countries or entities from payment messages sent through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) when processing transactions denominated in US dollars. Although it is unclear from the allegations whether the underlying transactions, some of which involved so-called “U-turn” payments, were prohibited, US enforcement authorities focused on the acts of concealment by RBS personnel.
This case demonstrates the important enforcement role NYDFS serves for financial institutions operating in New York. The simultaneous settlements with RBS by NYDFS and the two federal regulators suggest that the level of inter-governmental cooperation and coordination may be increasing in the sanctions enforcement arena. Additional detail about the three RBS settlements is provided below.
Without admitting or denying any of OFAC’s allegations, RBS concluded a settlement related to its processing approximately 434 transfers between 2005 and 2009 involving Iran, Sudan, Cuba, and Burma. Certain allegations are highlighted below.
- National Westminster Bank (NatWest), which RBS acquired in 2000, acted as a correspondent bank processing US dollar transactions that involved Bank Melli of Iran, and also sent SWIFT payment messages to US clearing banks that did not include any reference to the Iranian parties. RBS personnel omitted that identifying information apparently because they knew US bank systems would reject transfers that referenced Iran.
- RBS personnel developed a system, including written instructions, to send US dollar-denominated payments to Iran through third-country banks by omitting any reference to Iran in the cover payment messages sent to US financial institutions. Although the Bank’s wire stripping and concealment practices were originally limited to certain Iranian banks, RBS eventually applied them in processing payments involving entities from other sanctioned countries.
- After RBS decided to stop conducting US dollar business with Iranian parties, it excluded U-turn payments from that policy and continued to process US dollar payments through the United States.
RBS agreed with OFAC to a settlement amount of $33 million, which RBS was permitted to satisfy by paying an equal or greater amount, arising from the same activities, to the Federal Reserve. RBS is also required to provide OFAC copies of all compliance materials that it submits to the Federal Reserve. The Bank has committed to prohibit US dollar payments to sanctioned countries and to review its customer base to identify relationships that should be terminated.
Federal Reserve Settlement
In a related cease-and-desist consent order, the Federal Reserve assessed a $50 million civil penalty against RBS for “unsafe and unsound practices related to insufficient oversight” by RBS of its US dollar clearing practices and economic sanctions compliance programs. RBS must submit to the Federal Reserve within 90 days a plan to implement a more robust compliance program, including risk assessments, transaction screening, employee training, annual assessments, independent annual audits of US dollar payments, quarterly reports to the Federal Reserve, an internal compliance reporting system, and a commitment to ensure adequate staffing and funding of the compliance function. The UK’s Financial Conduct Authority (FCA) will assist the Federal Reserve in supervising the order.
Finally, RBS agreed to settle with NYDFS by making a $50 million civil monetary payment. The Bank was subject to NYDFS jurisdiction because it was licensed to operate as a foreign bank branch in New York. NYDFS alleged that, between 2002 and 2011, RBS conducted over 3,500 transactions worth $523 million through New York correspondent banks involving Sudanese and Iranian customers and beneficiaries, including entities on OFAC’s Specially Designated Nationals (SDN) List.
The settlement states that “RBS’s conduct was at odds with U.S. national security and foreign policy and raised serious safety and soundness concerns for regulators”. NYDFS cited four provisions of law underlying those “concerns”, all of which it has relied on in past sanctions cases, including with Standard Chartered Bank. Those provisions are P.L. § 195.05 (obstructing governmental administration), 3 N.Y.C.R.R. § 300.1 (failure to report crimes and misconduct), P.L. § 175.35 (offering false instruments for filing) and P.L. § 175.10 (falsifying business records). In its press release announcing the RBS settlement, NYDFS said the Bank’s “misconduct . . . violated New York Law”. It is noteworthy that, unlike in the case of Standard Chartered Bank, NYDFS did not cite any federal economic sanctions provisions in the RBS settlement.
It is clear that NYDFS will use any legal hook it can find to continue its aggressive push into sanctions enforcement. Offshore banks, insurers and reinsurers would be well-advised to think carefully about the intersection of their business operations and NYDFS regulatory authority.
RBS has incurred significant costs related to this matter. In addition to the $100 million it paid to the Federal Reserve and NYDFS, the Bank has reportedly committed almost £300 million (approximately $490 million) since 2010 in an effort to strengthen its financial and regulatory controls, including adding 730 employees to its anti-money laundering and sanctions compliance team, which now includes approximately 1,700 personnel. Like the previous cases against foreign financial institutions, this matter underscores the risk of engaging in conduct related to Iran or other sanctioned countries.
A lesson that foreign financial institutions and other multinational companies should draw from these cases is that they continue to face significant risk if they engage in any business related to parties or countries (particularly Iran, Cuba and Sudan) that are restricted under US economic sanctions provisions, even if their activities may have appeared to be lawful at the time. Such activities create risk when they have even a minimal nexus with the United States, including clearing financial transactions in US dollars, furnishing financial services through institutions in the United States, processing payments through foreign branches of US financial institutions, or knowingly relying on services provided by US persons anywhere in the world to facilitate, participate in, approve, or support restricted transactions.
Foreign persons providing a variety of financial services, including banking, money remittance, insurance, reinsurance, investment, foreign exchange, mortgages and secured transaction/letter of credit services, should recognize the inherent US enforcement risk in concealing or intentionally omitting identifying information from payment messages involving a sanctioned country, entity or person, when the transaction has some nexus to the United States or US persons (including US dollar exchange). Deceptive activity also formed the basis for part of the recent settlement against Weatherford International Ltd. (see our advisory on Weatherford).