In recent weeks, the New York State Department of Financial Services (NYDFS) has increased its enforcement and compliance activities related to US sanctions law, targeting foreign financial institutions operating in New York, as well as non-US reinsurers. The latest bank to settle with the New York regulator over apparent sanctions-related violations of New York law is Bank of Tokyo Mitsubishi-UFJ, Ltd (BTMU). This follows similar settlements by NYDFS with Standard Chartered Bank and with Deloitte Financial Advisory Services within the past year. In addition, last week NYDFS sent letters to approximately 20 non-US reinsurers requesting in-depth information about their compliance with the Iran Freedom and Counter-Proliferation Act of 2012 (IFCPA). These activities signal that NYDFS will likely continue its enhanced scrutiny of foreign banks and reinsurers for the foreseeable future, bringing increased compliance risks for entities operating under the New York regulator’s jurisdiction.
Bank of Tokyo Mitsubishi Settlement
On June 20, 2013 New York Governor Cuomo announced that BTMU has agreed to a $250 million settlement with NYDFS regarding apparent New York banking law violations related to transactions involving sanctioned countries and entities, including Iran, Sudan, and Burma (also known as Myanmar). This settlement follows BTMU’s December 2012 settlement of $8.6 million with the Office of Foreign Assets Control (OFAC) of the US Treasury Department.
According to the NYDFS settlement agreement, from at least 2002 to 2007 BTMU violated New York banking law by routing US dollar payments through New York after Tokyo employees first removed information identifying sanctioned parties. The conduct included written operational instructions for Tokyo employees to remove names of final receiving banks in order “to avoid freezing of funds”. The US dollar payments BTMU cleared through New York during this period included approximately 28,000 payments worth close to $100 billion involving Iran, as well as additional payments involving Sudan, Burma, and certain entities on OFAC’s Specially Designated Nationals list.
In addition to the $250 million penalty for this conduct, BTMU must also install an independent consultant for one year to review BTMU sanctions compliance programs, policies, and procedures. The consultant will have the authority to recommend needed corrective measures and oversee their implementation, and will report to NYDFS.
BTMU’s related December 2012 OFAC settlement followed an internal investigation and voluntary self-disclosure to OFAC by the bank relating to apparent violations of US sanctions laws from 2006 and 2007 involving Burma, Iran, Sudan, and Cuba, as well as sanctions targeting weapons of mass destruction proliferators and their supporters. The civil settlement reflected OFAC’s finding that the apparent violations were egregious, despite BTMU’s substantial cooperation and no prior history of OFAC violations, based on the following facts and circumstances:
- BTMU’s conduct hid the involvement of the US sanctions targets and displayed reckless disregard for US sanctions;
- The BTMU Tokyo Operations Center general manager knew or had reason to know that its procedures instructed employees to manipulate payment instructions;
- BTMU’s conduct conferred a substantial economic benefit to OFAC sanctions targets; and
- BTMU is a large, commercially sophisticated financial institution.
BTMU’s substantial settlement with NYDFS reflects the state regulator’s increasing activity in cases involving US sanctions and foreign-based banks operating in New York. In August 2012, the regulator reached a precedent-setting $340 million settlement with Standard Chartered Bank regarding that bank’s dealings with Iran. In the reverse order of the BTMU settlements, in December 2012, Standard Chartered also reached a $132 million settlement with OFAC for the same activity. The BTMU and Standard Chartered settlements illustrate NYDFS’s focus on sanctions violations by New York banks, and at least in these two cases, their willingness to demand settlements for alleged violations of New York banking law that are substantially in excess of the settlements reached with US federal regulators. The BTMU case is also significant as it is the first Asia-based bank targeted for sanctions violations by both OFAC and the NYDFS.
Non-US Reinsurers’ Compliance with Iran Sanctions Law
A new set of Iran sanctions went into effect on July 1st pursuant to the IFCPA and Executive Order 13645, which impose sanctions on certain activities involving the Iranian energy, shipbuilding, shipping, and automotive sectors. The implementation of these sanctions, which target, among other things, the provision of insurance, reinsurance, and underwriting services for any activity for which sanctions have been imposed under US law, was accompanied by letters from NYDFS to a group of non-US reinsurers. The letters request survey information about compliance with the IFCPA from non-US reinsurers who are part of a NYDFS “Certified Reinsurer” program.
The new IFCPA sanctions significantly broaden prior US extraterritorial sanctions targeting the insurance and reinsurance industries’ involvement in Iran-related transactions. They provide for the imposition of sanctions against any person who knowingly provides insurance or reinsurance (1) covering Iran-related activity for which sanctions have already been imposed under the various extraterritorial sanctions statutes; (2) covering Iran-related activity in any targeted sector such as energy, shipping or ship-building, or involving targeted materials such as graphite, raw or semi-finished metals, or coal, or involving any persons designated for sanctions in connection with Iran’s efforts to acquire weapons of mass destruction or its support of terrorism; or (3) issued to or for any Iranian person listed as a specially designated national or blocked person by the Office of Foreign Assets Control (OFAC) in the US Treasury Department (except for certain financial institutions). The President can waive the imposition of sanctions in some circumstances if the insurer or reinsurer is determined to have exercised appropriate due diligence in establishing and enforcing controls designed to avoid engaging in sanctionable activity.
The NYDFS letters ask unusually detailed questions about various aspects of the reinsurers’ efforts to comply with a law that is just now going into effect, and also asks reinsurers to name its insureds who may engage in Iran-related transactions. The information requested includes, among other things:
- the lines of business that may be subject to sanctions under the IFCPA;
- policies and procedures in place to ensure compliance with the IFCPA;
- an explanation of how the company ensures that underwriters correctly ascertain whether a policy may cover transactions that are prohibited by the IFCPA;
- information the company requires from maritime policyholders relating to each shipment covered;
- the rights the company has to verify a maritime policyholder’s representations;
- the company’s internal response to press reports that particular commodities trades by Glencore Xstrata and Trafigura potentially violated the US Iran sanctions regime;
- a copy of any policy that may cover the Glencore Xstrata and Trafigura transactions;
- a list of all insureds that the company has identified as potentially engaging in business with Iran or any entity or person affiliated with Iran; and
- specific aspects of the company’s due diligence relating to Iran sanctions compliance.
Unlike NYDFS’s settlements with non-US banks, its outreach to reinsurers regarding US sanctions law appears primarily focused on compliance – rather than enforcement – measures at this stage, although that could change based on the information it receives in response to its letters. For more detailed information regarding NYDFS outreach to reinsurers, see our recent advisory.