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$152 Million Penalty Against Financial Institution for Iran Sanctions Violations

Monday, January 27, 2014
Sandler, Travis & Rosenberg Trade Report

The Treasury Department’s Office of Foreign Assets Control reported Jan. 23 that a financial institution based in Luxembourg will pay $151.9 million to settle potential civil liability for apparent violations of the Iranian Transactions and Sanctions Regulations. OFAC states that this enforcement action highlights the particular sanctions risks faced by intermediaries, custodians and other firms operating in the international securities markets.

A Treasury press release indicates that the institution (a) held an omnibus account at a bank in New York through which the Central Bank of Iran maintained a beneficial ownership interest in 26 corporate and sovereign bonds, with a nominal value of $2.8 billion, and (b) exported certain associated securities-related services to the CBI. Treasury also alleges that after the institution told OFAC officials it intended to terminate its business with Iranian clients, the CBI’s interest was “buried one layer deeper in the custodial chain” when its securities entitlements were transferred from its own account with the institution to that of a European commercial bank acting as a custodian for the CBI’s assets. Despite this transfer, the ultimate place of custody of the securities remained in the U.S., the securities were still held in the institution’s omnibus account at the New York bank, and the exportation of services from the U.S. to the CBI continued. Treasury cites evidence that at least one supervisor and one senior executive with the institution knew or should have known that the transfer would not change the beneficial ownership of the securities entitlements.

OFAC determined that the institution did not voluntarily self-disclose the apparent violations, which were reckless and constitute an egregious case. Nevertheless, the penalty amount was mitigated down from $5.6 billion because, among other things, the institution has undertaken significant remedial action by enhancing its controls to prevent a recurrence of the apparent violations and has adopted new best practices in an effort to position itself as an industry leader in sanctions compliance standards. Specific measures the institution has adopted include conducting enhanced customer due diligence as well as account and transaction monitoring in order to increase its understanding about the beneficial ownership of securities in its system (e.g., requiring information about customers’ relationships with any sanctioned persons or countries), limiting which of its customers are eligible to hold omnibus accounts based on the risk profile of the customer and other compliance standards, and requiring customers to certify that they will not use or permit the indirect use of their accounts for any transaction, service or relationship that would violate applicable sanctions law.

The press release states that the activity in question highlights the need for vigilance in the securities industry, where vehicles such as omnibus accounts, as well as the intermediated nature of the securities custody industry itself, can serve to obscure the beneficial ownership interests of sanctioned parties. OFAC therefore encourages firms operating as securities intermediaries and custodians to implement measures to mitigate the risk of indirectly providing custody-related services to parties subject to U.S. sanctions or dealing in property owned by those parties. Such measures can include conducting due diligence to identify customers who do business in or with countries or persons subject to U.S. sanctions, imposing restrictions and heightened due diligence requirements on the use of certain products or services by customers who are judged to present a high risk from an OFAC sanctions perspective, and monitoring accounts to detect unusual or suspicious activity.

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