Last week, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced a settlement with Société Générale S.A. (“Soc Gen”) for violations of various OFAC administered sanctions programs. The OFAC settlement of $53,966,916.05 represented only a portion of a larger $1.3 billion amount Soc Gen is paying out to various authorities–including, the New York Department of Financial Services (“NYDFS”), the United States Department of Justice (“DOJ”), the Federal Board (“Fed”), and the Manhattan District Attorney’s Office (“DANY”)–for its conduct. As with any sanctions-related enforcement action of this size, there is a lot to unpack. However, this post will only look at the Soc Gen-OFAC settlement and try to draw some lessons from that.
The key facts are as follows. Soc Gen is a French bank who was investigated by OFAC for over a thousand transactions in apparent violation of three sanctions programs: 1) the Cuban Assets Control Regulations (“CACR”); 2) The Iranian Transactions and Sanctions Regulations (“ITSR”); and 3) The Sudanese Sanctions Regulations (“SSR”). Although Soc Gen self-disclosed their conduct in May of 2012, OFAC determined the conduct to be egregious. The total value of the transactions subject to the settlement was $5,560,452,944.36. Specifically, the conduct involved Soc Gen processing transactions that removed, omitted, obscured, or failed to reference sanctioned interests present in transactions sent through U.S. financial institutions for processing.
Although certain violations were first disclosed in May 2012, Soc Gen later filed a supplemental self-disclosure in February 2013 after it had conducted an expanded review and identified other transactions that were potentially violative of OFAC administered sanctions programs. That review was expanded again in early 2014 following discussions between Soc Gen’s counsel, OFAC, and other investigating agencies. The expansion extended the investigation to certain business lines, the bank’s correspondent banking business, and a division of Soc Gen’s Corporate and Investment Bank.
Through the review and corresponding disclosures, OFAC found that the apparent violations were not confined to a particular branch or business line and that multiple branches and business lines of the bank were involved. Further, although Soc Gen maintained a sanctions compliance program, several units did not receive proper guidance at the time of the conduct and continued to process apparent violations. Finally, the disclosures revealed a 2003 memo that provided guidance on processing USD transactions with sanctioned jurisdictions by omitting parties from sanctioned jurisdictions names and addresses from payment messages. Certain of these transactions involved credit facilities related to dealings with Cuba, Iran, and Iranian parties. With respect to the Iran-related credit facility transactions they were ceased following receipt of advice from external counsel in the U.S. in January 2009. The last prohibited transaction OFAC noted in its settlement–that involving the SSR–occurred on March 19, 2012.
OFAC found that Soc Gen was cooperative throughout the investigation by providing requested information and documentation, signing multiple tolling agreements, and expending significant resources to investigate the bank’s potential violations. As part of the settlement, OFAC identified a number of remedial measures undertaken by Soc Gen including:
- creating a centralized and independent sanctions compliance function that continues to implement enhancements;
- increasing staffing for its sanctions compliance function and tripling its budget;
- creating and focusing the roles of its sanctions compliance personnel and reorganized reporting lines;
- enhancing Know Your Customer, Customer Due Diligence and sanctions screening controls to better identify customers that present heightened sanctions risk; and
- increasing and augmenting its sanctions compliance related training.
While all of this is interesting, what is the big take away? Voluntary Self-Disclosures to OFAC can open Pandora’s Box. I say this noting that OFAC’s Enforcement Guidelines encourage subject persons to submit self-disclosures of conduct they believe could be a violation of OFAC administered sanctions programs, even when it is unclear that a violation has occurred. While that’s great for OFAC, it’s not necessarily great for financial institutions. The facts at play in Soc Gen demonstrate this clearly, as an OFAC self-disclosure lead not only to an approximately $53 million settlement with OFAC, it also led to huge settlements with DFS, DOJ, DANY, and the Fed. Further, as Soc Gen notes in their press release, the that vast majority of the settled transactions originate from settlements involving Cuba related to a single revolving credit facility opened in 2000. Even more to the point, many of the transactions didn’t even occur in this decade and, aside from some of the SSR transactions, the conduct ceased years prior to the VSD.
So what I am saying here? Don’t file VSDs? No, not necessarily. But be clearheaded about when to file a VSD, and understand the consequences for doing so. This is particularly true, when you’re a financial institution as OFAC is required by Memoranda of Understanding entered into with a number of state regulators to share information concerning sanctions violations with those regulators. A VSD can be a wonderful thing. It can save you from the trouble of having to respond to a subpoena, can offer substantial mitigation of an enforcement response, and is (sometimes) the right thing to do. That said, there’s are downsides to filing them as well, as they can lead to additional scrutiny from regulators, massive multi-year investigations, and tremendous expense in legal fees and remediation….not to mention billions in settlements or fines. Indeed, it’s the regulators and prosecutors that most financial institutions have to fear in this scenario, as evidenced by the fact that only 4% of what Soc Gen is paying out is for the OFAC settlement.
So did Soc Gen do the right thing in self-disclosing their apparent violation? I can’t say. I wasn’t counsel on that case and the only facts I have are what is available publicly. What I will speculate on, however, is that financial institutions will draw a lesson from this and think long and hard about the consequences before going to OFAC with their apparent violations.