ICT Views

Play in my sandbox, play by my rules (an update on OFAC penalties)

by: (Financial Crime Compliance Course Director) on

A common question I have been asked during workshops is why are OFAC penalties so high, and how does OFAC decide how much to fine a firm caught in breach of US sanctions? 

Another common question is where does the money go?

Another common question is why are there so many regulatory fingers in the pie when there is a fine or a settlement being negotiated?

Of course there are a number of answers mooted, the most cynical being that UK and European Banks are being targeted to pay off US National Debt and that all the US regulators want a piece of the action as they get to keep the cash…………..etc………..etc…………..

Last week I was fortunate enough to attend a sanctions conference attended by representatives from OFAC where some answers were provided.

So for those of you who are curious, this is how it works….

Where does the money go?

Contrary to popular belief, not all the money goes to the individual bodies so in reality they are not financially motivated simply to get in on the action; E.g. OFAC might consider a penalty satisfied if an entity has settled with another regulatory body – and the money ultimately goes to the US Treasury, not to pay for the OFAC Christmas party.

SanctionsWhy are the penalties so high?

Banks are being fined huge amounts and one that resonated more recently was the $8.9bn fines imposed on BNP Paribas. Prior to 2007, penalties for sanctions breaches were much lower and there was a concern that entities were simply building these costs into their risk models as the cost of doing business, and taking the chance they wouldn’t get caught, but if they did they could absorb the cost  of any fine.  It was perceived that that the banks in particular were breaching sanctions on a risk versus reward basis.

In response to this, OFAC went before Congress and the International Emergency Economic Powers Act was enacted.  This increased penalties for breaches to the greater of $250, 000 per violation, or twice the value of the transaction that gave rise to the transaction.  There were also left with further wiggle room in terms of what was considered a transaction, for example a letter of credit could be considered as one transaction, or OFAC could add up the value of all the underlying payments made against that LC.  Criminal penalties for willful violations can also include imprisonment of up to 30 years. Civil penalties for violations of the Trading with the Enemy Act can range up to $65,000 for each violation. Civil penalties for violations of the Foreign Narcotics Kingpin Designation Act can range up to $1,075,000 for each violation.  When deciding the appropriate level of enforcement to take, the stance taken depends very much on the attitude of the institution in question and considerations include:

  • Was the disclosure of the breach voluntary or not?
  • Was the conduct that gave rise to the breach egregious (think ING, Standard Chartered)?
  • Was it the first violation, or is there a history of violations, even if self-reported?

So an institution that has self-reported an honest mistake will likely be fined but considerably less than an institution that has designed policies and procedures to enable its clients to circumvent sanctions.

When it comes to sanctions violations, the US Department of Justice can also impose penalties and they can require an institution to forfeit dollar for dollar on the value of the transactions that led to the violation.  Similarly to OFAC, they will consider the nature of the breach and how much cooperation they receive, improvement in compliance processes etc.  when determining the level of forfeiture.

So to all those that think the penalties may be disproportionately high, this might seem to be the case but the numbers are not arbitrary - the US enforcement agencies are simply taking the profit out of sanctions violation as a deterrent to institutions and they are getting better at uncovering those violations.

The message from the US is clear, if you want to deal in our currency, abide by our rules.




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