Thomas E. L. Dewey
Thomas E. L. Dewey ()

The specter of foreign bank violations of U.S. economic sanctions reared its head again in December. The Royal Bank of Scotland Group plc and The Royal Bank of Scotland plc (together, for the purposes of this article, RBS) have been investigated for violations of U.S. law, following accusations that RBS engaged in transactions that involved countries subject to international sanctions, such as Iran, Sudan and Burma. In separate actions, RBS agreed to settlements with the Board of Governors of the Federal Reserve System, the Office of Foreign Asset Control (OFAC), and the New York State Department of Financial Services (DFS). The combined settlement total was $100 million. This is another bump in the road for RBS, which was bailed out by the UK government and currently owns 81.14 percent of the RBS Group;1 there are also, however, several features of interest in the settlements.

Claims Asserted

In 2010, RBS initiated an investigation into its U.S. dollar payment practices in the UK.2 The concern was that RBS U.S. dollar transactions were violating U.S. sanctions programs relating to Iran, Sudan, Burma and Cuba. The investigation concerned procedures that allowed RBS to process transactions linked to U.S. sanctioned entities through U.S. banks without detection.

On July 26, 2011, RBS and its U.S. branches entered into a cease and desist order to address U.S. branch compliance with the Bank Secrecy Act, regulations issued thereunder by the U.S. Department of the Treasury and Regulation K of the Board of Governors.3 The order also addressed the implementation of OFAC regulations.4

To resolve the continuing investigations, in December 2013, RBS agreed to enter into settlement agreements with the Federal Reserve, OFAC and the DFS.

The Settled Resolution

Separate but simultaneous consent orders record the RBS settlements with the Federal Reserve, OFAC and the New York State DFS. Under these agreements, RBS has agreed to pay $50 million to the DFS and $50 million to the Federal Reserve, of which $33 million is attributed to the OFAC settlement penalty.5 These settlements resolve the civil aspect of the investigation and both the U.S. Department of Justice and the district attorney of New York concluded that no criminal action is to be taken against RBS.6

The $100 million settlement figure may dominate the headlines,7 but the real points of interest in these settlements are more subtle. The consent orders demonstrate an intriguing narrative, not least because the United Kingdom’s Financial Conduct Authority has promised to assist with enforcement, but also due to RBS’s apparent admission of failings.

Failings Acknowledged

RBS, in a press release commenting on the settlement, announced that “RBS plc has cooperated fully with the U.S. Authorities and acknowledges and deeply regrets these failings.”8 When coupled with a notable absence of “no-admit-no-deny” language in both the Federal Reserve and DFS settlements, the question is raised as to whether admissions, or the semantically identical ‘acknowledgment of failings,’ in settlements are on the rise. The topic of admissions in settlement agreements, of course, is an area of current interest following the “no-admit-no-deny” policy announced by U.S. Securities and Exchange Commission Chairwoman Mary Jo White in 2013. Such a policy, which demands accountability through an admission, presents litigants with a much tougher road to settlement than they have had in the past.

The consent order between RBS and the Federal Reserve criticizes RBS practices as “unsafe or unsound.”9 It summarizes historic RBS practices into two failings. First, that RBS lacked adequate risk management and legal review policies to ensure compliance with OFAC regulations. Second, that from at least 2005 to 2008 some business lines within RBS adopted policies for processing U.S. dollar transfers in a manner that either violated applicable OFAC regulations or contained details too vague for U.S. authorities to determine their legality.

The consent order between RBS and DFS hones in on the lack of transparency in RBS’s U.S. dollar transfer dealings. In contrast to the consent order with the Federal Reserve, it goes further by including salacious detail. First, the scale of the matter is revealed. More than 3,500 transactions concerning Iranian and Sudanese customers, valued at approximately $523 million, went through New York correspondent banks.10

Second, the mode of deception is admitted. In order for sanctioned customers to gain access to the U.S. financial system, RBS gave UK employees written step-by-step instructions on how to conceal U.S. dollar payments involving sanctioned entities being routed through the United States. The consent order explains that this was done by stripping identifying information from the transfers to prevent its own payment system from automatically picking up references. A caption from the ill-fated guide is even reproduced in the consent order.11

Third, it reveals how high these violations went in the corporation. RBS group head of Anti-Money Laundering and the head of Global Banking Services for Europe, Middle East and Africa “were fully aware of and in some instances even provided such instructions to employees.”12

The narrative of these agreements comes at an interesting time for the issue of admissions in settlements. In 2013, SEC Chair White announced a move away from the “no-admit-no-deny” policy for settling cases. Instead, a new policy was adopted whereby, in appropriate cases, the SEC would demand an admission of liability. The rationale, as explained by White, is that in particularly egregious cases monetary penalties alone are insufficient and admissions are required to deliver public accountability.13 This policy was first implemented in the settlement between the SEC and the hedge fund Harbinger Capital Partners and Philip Falcone, its founder.

Certainly, the RBS and DFS consent order indicates a similar hunger for public accountability. However, posing a curious anomaly, the settlement agreement between RBS and OFAC does contain “no-admit-no-deny” language.14 This is, seemingly, not unusual in OFAC violation settlements. For example, the settlement agreement between Standard Chartered Bank and OFAC, relating to similar issues of sanction compliance in 2012, contained near identical no-admit-no-deny language.15

The “no-admit-no-deny” language of the OFAC settlement dampens the idea of a potentially regulator-wide shift in policy toward demanding admissions in settlements. However, as other banks come before the Federal Reserve and/or the DFS, it will be interesting to see whether RBS’s acknowledgment of failures reflects a more gradual and paced trend toward higher accountability in settlements and whether this will make the road to settlement more challenging.

Individual Wrongdoers

A slither of positive PR is offered in the consent orders. Both consent orders with the Federal Reserve and DFS explicitly reference voluntary disclosures and admissions made by RBS.16 As such, no reader of the settlement agreements could be under any other impression than that RBS fully cooperated and was proactive in assisting with the state and federal investigations. The DFS consent order specifically recognizes RBS cooperation and disciplinary action taken by the bank against individual wrongdoers. It reveals that a total of four employees were dismissed, including the head of the Money Laundering Prevention Unit—Corporate Markets, and eight employees were subject to bonus claw-backs.17

The emphasis on individual wrongdoers should prick the attention of other banks finding themselves under similar investigation. Benjamin M. Lawsky, the Superintendent of Financial Services, praised RBS for terminating employees guilty of misconduct and commented, “[i]f we truly want to deter future wrongdoing, we should move increasingly toward exposing individual misconduct and holding individuals accountable.”18

Remedy and Enforcement

The consent order between RBS and the Federal Reserve goes further than just providing a financial remedy. The settlement establishes an “OFAC Compliance Program” which sets out minimum requirements for new policy and procedures, assessments and training. RBS admits that this remediation plan is “extensive” and has committed almost $490 million to remedy such “shortcomings identified in its investigation.”19

Trans-Atlantic supervision of this stringent compliance program is addressed by the settlement. To ensure that RBS conforms to the standards of the OFAC Compliance Program, the United Kingdom’s Financial Conduct Authority has agreed to assist in supervising the program.20 The Financial Conduct Authority also cooperated with the prior investigation into RBS violations.21 This marks an interesting Anglo-American partnership in upholding U.S. sanctions.

More to Come?

RBS is not the first international bank to find itself in hot water with U.S. regulators over transactions with sanctioned nations. Lloyds TSB agreed to pay $350 million to U.S. authorities for sanction violations in 200922 and, as mentioned above, Standard Chartered was fined $327 million for alleged historical sanction violation in 2012.23 Furthermore, the official announcements by OFAC, DFS and the Federal Reserve made sure that banks are in no doubt that RBS will not be the last international bank to be hauled before the regulators over transactions with sanctioned countries. The comments of Adam Szubin, OFAC director, entertain the suggestion of a trend for intra-agency investigation into these types of violations. Szubin commented, “[t]his action…underscores our commitment to work with our federal and state partners in the regulatory community to ensure the U.S. financial system is protected from the risks associated with this type of illicit financial behavior.”24

This sentiment is echoed by Governor Andrew Cuomo who commented that “[i]n New York, we will continue our aggressive work rooting out global money laundering that puts our national security at risk.”25 Similarly, David Cohen, Under Secretary for Terrorism and Financial Intelligence, as he announced the settlement said, “[w]e remain resolute in enforcing our comprehensive sanctions against Iran, and we will continue to take aggressive action against those who would flout our law.”26

Conclusion

The promises by enforcement authorities to continue strict enforcement leaves little doubt that more international banks are going to be subject to investigation and potential penalty over U.S. sanction violations. As a part of the subsequent settlement process, it remains to be seen whether RBS’s ‘acknowledgement of failures’ is an isolated incident or part of a larger trend. However, it is perhaps more probable for accountability to be sought out against individual wrongdoers. By reflecting on the comments of Lawsky, the goal of individual accountability has seemingly crystallized in the mind-set of the authorities.

Thomas E.L. Dewey is a member of Dewey Pegno & Kramarsky. Victoria Kehoe, an attorney at the firm (not yet admitted) assisted in the preparation of this article.

Endnotes:

1. Key Facts About RBS, RBS, http://www.rbs.com/about/business-strategy/key-facts.html (last visited Jan. 7, 2014).

2. Settlement with U.S. Authorities Regarding OFAC Compliance, RBS News (Dec. 11, 2013), http://www.rbs.com/news/2013/12/fine-to-settle-us-sanctions-violation-probe.html.

3. Cease and Desist Order Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended, Board of Governors of the Federal Reserve System, at 4 (July 26, 2011), http://www.federalreserve.gov/newsevents/press/enforcement/enf20110727a1.pdf.

4. Id. at 4.

5. Settlement Agreement, Department of the Treasury, at 6 ¶28 (Dec. 11, 2013), http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/12112013_rbs_settle.pdf.

6. RBS News, supra note 2.

7. See, e.g., “RBS Fined $100m by U.S. for Iran Sanctions Violations,” BBC News (Dec. 11, 2013), http://www.bbc.co.uk/news/business-25341882; Matthew Goldstein, “R.B.S. to Pay $100 Million to Settle Inquiries Into Violations of Sanctions,” The New York Times Dealbook (Dec. 11, 2013), http://dealbook.nytimes.com/2013/12/11/r-b-s-to-pay-100-million-to-settle-inquiries-into-violations-of-sanctions/?_r=0.

8. RBS News, supra note 2.

9. Order of Assessment of Civil Money Penalty, Board of Governors of the Federal Reserve System, at 3 (Dec. 11, 2013), http://www.federalreserve.gov/newsevents/press/enforcement/enf20131211a2.pdf.

10. Consent Order Under New York Banking Law §44, New York State Department of Financial Services, at 1 (Dec. 11, 2013), http://www.dfs.ny.gov/about/press2013/131211-rbs.pdf.

1. Id. at 2.

12. Id. at 3.

13. Chair Mary Jo White, Deploying the Full Enforcement Arsenal, SEC (Sep. 26, 2013), http://www.sec.gov/News/Speech/Detail/Speech/1370539841202#.UsyVzNEo6Uk.

14. Department of the Treasury, supra note 5, at 6 ¶28.

15. Settlement Agreement, Department of the Treasury, at 6 ¶32 (Dec. 10, 2012), http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/121210_SCB_settlement.pdf.

16. Order to Cease and Desist, Board of Governors of the Federal Reserve System, at 2 (Dec. 11, 2013), http://www.federalreserve.gov/newsevents/press/enforcement/enf20131211a1.pdf; New York State Department of Financial Services, supra note 10, at 2.

17. New York State Department of Financial Services, supra note 10, at 4, Fn. 5.

18. Cuomo Administration Announces RBS to Pay $100 Million For Violations of Law Involving Transactions with Iran, Sudan, Other Regimes, New York State Department of Financial Services (Dec. 11, 2013), http://www.dfs.ny.gov/about/press2013/pr1312111.htm.

19. RBS NEWS, supra note 2.

20. Board of Governors of the Federal Reserve System, supra note 16, at 3.

21. Treasury Department Reaches $33 Million Settlement With the Royal Bank of Scotland plc, U.S. Department of the Treasury (Dec. 11, 2013), http://www.treasury.gov/press-center/press-releases/Pages/jl2239.aspx.

22. Lloyds TSB Bank Plc Agrees to Forfeit $350 Million in Connection with Violations of the International Emergency Economic Powers Act, Department of Justice (Jan. 9, 2009), http://www.justice.gov/opa/pr/2009/January/09-crm-023.html.

23. Standard Chartered Reaches Final Settlement with U.S. Authorities, STANDARD CHARTERED (Dec. 10, 2012), https://www.sc.com/us/press-releases/dec-10-12/en/.

24. U.S. Department of the Treasury, supra note 21.

25. New York State Department of Financial Services, supra note 18.

26. U.S. Department of the Treasury, supra note 21.