On January 22, 2014, the US Department of Treasury, Office of Foreign Assets Control (OFAC) concluded a regulatory enforcement action against Luxembourg-based Clearstream Banking, S.A. (Clearstream), in which Clearstream agreed to pay $150 million to settle charges that it had violated the Iranian Transactions and Sanctions Regulations (ITSR, 31 C.F.R. Part 560). Additionally, on January 27, 2014, OFAC concluded an enforcement action against the Bank of Moscow, based in Russia, in which the bank agreed to pay $9 million to settle charges it had violated the Weapons of Mass Destruction Proliferators Sanctions Regulations (WMDPSR, 31 C.F.R. Part 544).
Furthermore, on February 6, 2010, OFAC designated three Republic of Georgia-based individuals and eight companies they control as “foreign sanctions evaders” under Executive Order 13608, and also announced the publication of a new Foreign Sanctions Evaders List (FSE List). We have previously advised on the restrictions set forth in Executive Order 13608.
These actions demonstrate that OFAC continues to target foreign financial institutions and other foreign persons that act on behalf of, or obscure the involvement of, a restricted Iranian entity or Specially Designated National (SDN). Both OFAC and the New York State Department of Financial Services (NYDFS) have been active in this field. 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 (August 2012), HSBC, Standard Chartered Bank and Bank of Tokyo-Mitsubishi UFJ, Ltd. (December 2012), Bank of Tokyo Mitsubishi-UFJ, Ltd. (June 2013), and Royal Bank of Scotland Group, plc (December 2013).
Clearstream Settlement Regarding Export of Services from the United States
Without admitting or denying any of OFAC’s allegations, Clearstream concluded a civil settlement related to claims that, from December 2007 to June 2008, it maintained an account at a New York financial institution through which the Central Bank of Iran (CBI) had a beneficial ownership interest in $2.813 billion in US securities. Clearstream allegedly held these securities for the CBI in its capacity as a securities intermediary. OFAC alleged that maintaining this account and providing related services violated the prohibition against exporting services from the United States to Iran set forth in Section 560.204 of the ITSR.
According to the settlement agreement, OFAC became aware in late 2007 that Clearstream maintained accounts in Luxembourg for Iranian entities, including the CBI. The CBI account allegedly included “entitlements” to approximately $2.813 billion in corporate and sovereign bonds that Clearstream held in an omnibus account at an unnamed bank in New York. In other words, while Clearstream was the registered owner of the bonds held in the New York account, it held the securities for the benefit of the CBI—the entitlement holder—which could direct the transfer or sale of the securities at any time. The physical securities certificates were maintained in central depositories located in the United States, which were not identified in the settlement agreement.
Following a request for information from OFAC, in December 2007 Clearstream apparently advised OFAC that it had decided to terminate its Iran business, but that its Iranian customers were having difficulties disposing of their securities entitlements. In early 2008, OFAC and Clearstream discussed how Clearstream could unwind its Iranian business.
OFAC alleged that in February 2008, at the CBI’s direction, Clearstream transferred the $2.813 billion in securities entitlements from the CBI’s Luxembourg account to a “customer” account that a European bank had opened, free of charge. (The OFAC settlement did not identify the European bank.) The European bank purportedly opened the account at Clearstream (in Luxembourg) in order to hold securities entitlements on behalf of its customers. OFAC alleged that Clearstream did not take adequate steps to determine whether the CBI retained beneficial ownership of the securities; and that Clearstream employees knew or should have known of this arrangement which added an ownership layer for the securities between the CBI and Clearstream.
OFAC concluded that a violation of section 560.204 of the ITSR occurred because by holding an account in the United States where the ultimate beneficiary was the CBI, Clearstream served as the intermediary through which the CBI was able to hold an interest in these securities located in the United States. In addition, the CBI was able to transfer or sell those interests at a later date, which was effectuated by Clearstream. Consequently, OFAC’s theory of liability appears to be that Clearstream exported custody and related financial services from the United States to the CBI without authorization.
Clearstream agreed to pay $151,902,000 to settle potential civil liability arising out of OFAC’s allegations. The base penalty amount was $5.626 billion, which was twice the value of the $2.813 billion in securities that Clearstream held for the CBI. Among other aggravating factors, OFAC noted that Clearstream acted recklessly in failing to exercise due diligence when transferring the securities entitlements to the European bank, and further did not self-report the potential violations. OFAC considered as mitigating factors the facts that the bank has subsequently strengthened its compliance controls and provided substantial cooperation to OFAC during its investigation.
Bank of Moscow Settlement Regarding Proliferation-Related Violations
OFAC alleges that from January 9, 2008 to July 13, 2009, the Bank of Moscow violated Executive Order (EO) 13382 and the WMDPSR by processing 69 funds transfers with a total value of $41,306,113 on behalf of the Russia-based Bank Melli Iran ZAO (BMI Russia), which is listed as an SDN for its proliferation activity. OFAC alleged that these transfers were processed to or through the United States by US financial institutions. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment messages that the Bank of Moscow sent in connection with the transfers did not include any specific references to “Melli,” “Iran,” or BMI Russia’s SWIFT code. OFAC alleged that the Bank of Moscow failed to exercise appropriate care.
In order to settle civil liability for sanctions violations associated with these allegations, the Bank of Moscow agreed to pay $9,429,525. OFAC stated that the base penalty amount was $14,063,000, although it is not clear how it arrived at this figure. Among other aggravating factors, OFAC considered the Bank of Moscow’s lack of care, lack of adequate compliance procedures, and the fact that the bank is a large and sophisticated institution. OFAC considered as mitigating factors, inter alia, the Bank of Moscow’s implementation of remedial measures and its entry into an agreement to toll the statute of limitations.
Foreign Sanctions Evaders Designations
OFAC designated three Georgia-based individuals—Pourya Nayebi, Houshang Hosseinpour, and Houshang Farsoudeh—as “foreign sanctions evaders” under Executive Order 13608, which imposes sanctions on persons that facilitate “deceptive transactions” on behalf of persons subject to US sanctions against Iran and Syria. OFAC also designated eight companies that the individuals own or control, located in Georgia, Liechtenstein, Switzerland, Turkey, and the United Arab Emirates. In the press release announcing the designations, OFAC stated that the sanctioned individuals used a Georgian bank and other associated companies to “deceive the international financial community” in facilitating transactions worth tens of millions of dollars for Iranian SDN banks, including Bank Melli, Mir Business Bank, Bank Saderat, and Bank Tejarat. The press release noted that the sanctioned individuals deceived Georgian financial regulatory authorities by withholding required reports of transactions involving Iranian banks, while their companies generated false invoices that concealed the involvement of Iranian banks from the international financial community. US persons are prohibited from engaging in any transactions or dealings with the sanctioned persons.
Furthermore, OFAC announced the publication of a standalone FSE List, which includes all persons that have been designated as “foreign sanctions evaders” under Executive Order 13608 to date. Such persons are not SDNs, as Executive Order 13608 does not provide for the blocking of the property and interests in property of sanctioned persons (although such persons may be designated as SDNs under other authorities). Rather, US persons are prohibited from engaging in any transactions or dealings with persons on the FSE List. The FSE List is available in several formats at http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/fse_list.aspx.
The theory under which OFAC alleges that Clearstream violated the ITSR is notable. OFAC alleged that Clearstream violated the ITSR by exporting services from the United States to Iran – even though (a) Clearstream is a foreign person located outside the United States, (b) no actual funds were transferred to the CBI from the United States, and (c) the CBI account for which Clearstream provided services was located in Luxembourg. OFAC apparently concluded that by holding securities in New York in which the CBI had an “interest,” Clearstream exported services from the United States to Iran.
OFAC’s settlement with the Bank of Moscow is similar to other actions in which OFAC alleged that foreign financial institutions obscured or withheld information that would have evidenced the involvement of SDNs and other restricted parties when transferring funds through the US financial system. OFAC noted that the action “highlights the particular sanctions risk faced by foreign financial institutions that maintain accounts for persons subject to OFAC sanctions and conduct significant business through the US financial system.”
OFAC’s designation of the Georgia-based “foreign sanctions evaders” targeted similar behavior directed at the international financial system. Executive Order 13608 is an important tool that OFAC can use to target persons that engage in deceptive transactions, which thereby prohibits US persons (including financial institutions) from dealing with them.
Finally, US persons should note OFAC’s promulgation of the FSE List, and should screen transactions against the list in addition to other screening procedures appropriate in the export controls and sanctions context.