The Treasury Department’s Office of Foreign Assets Control (OFAC) set a record June 12 with its $619 million settlement with ING Bank N.V. related to violations of U.S. sanctions against countries including Cuba and Iran. Other recent high-profile OFAC settlements include a
$536 million settlement with Credit Suisse AG, a $217 million settlement with Lloyds TSB, a
$176 million settlement with Barclays and an $88 million settlement with JPMorgan Chase, all related to violations of U.S. sanctions.

OFAC Director Adam Szubin said in a statement announcing the June 12 ING settlement, “Today’s historic settlement should serve as a clear warning to anyone who would consider profiting by evading U.S. sanctions.”

By now, however, large financial institutions seem to have gotten the message and are suitably scared.

“The big cases of the big financial institutions are vestigial legacies,” says Judith Lee, chair of Gibson Dunn’s International Trade and Regulation Compliance group. “Right now, if you’re a major financial institution, you’re not engaging in the type of activity that’s getting these big banks into trouble. Nobody is stripping information from wire transfers anymore.” (See “Record Settlement.”)

Instead, new trends are developing in the OFAC area, and one of the most interesting aspects of OFAC today is the U.S. sanctions laws’ expanding reach into other countries.

Creeping Extraterritoriality

“Not only is OFAC applicable to all U.S. companies, but now its reach really extends worldwide,” Lee says. “Except for the Cuba sanctions, which apply to foreign subsidiaries of U.S. companies, the law by its terms doesn’t apply to foreign companies, even if those foreign companies are wholly owned by U.S. companies, but little by little, OFAC has engaged in this creeping extraterritoriality.”

One example of that can be seen in the headline-grabbing bank cases. U.S. sanctions against Cuba, for instance, allow for violations against U.S. companies and their foreign subsidiaries, but the U.S. was able to nab ING, a foreign entity.

“It’s just a continuation of the extraterritorial nature of the law, where they’re going after foreign companies for violating what’s essentially a U.S. law,” says Berne Kluber, a partner at Locke Lord.

Companies OFAC accuses of violating sanctions laws generally pay fines to settle the allegations rather than challenge them, even in cases that involve only tenuous connections to the U.S., so judges don’t review the allegations.

“If you’ll notice, these European banks [in the large, headline-grabbing cases] all agree to settle the OFAC potential violations,” Kluber says. “OFAC has civil enforcement powers, and their claims would go through the administrative process if you want to protest them. And the administrative judges will defer to the administrative agencies, so a lot of companies will pay the fines and move on as opposed to fighting OFAC. On the [Department of Justice] side, you have a similar situation, where a lot of the companies will pay a penalty and move on rather than trying to make any new law or clarify the law.”

The nearly complete discretion that OFAC holds is one of the ways the extraterritorial nature of OFAC sanctions has developed.

Death Sentence

The threat of being listed by the U.S. as a specially designated national (SDN) is another factor in the development of extraterritoriality. When an individual or entity is listed, it is named as a prohibited party, no U.S. person or company can have anything to do with it, and it is cut off from accessing its U.S.-located assets. Lee calls this listing an economic death sentence.

A May 1 executive order, titled “Prohibiting Certain Transactions With and Suspending Entry into the United States of Foreign Sanctions Evaders With Respect to Iran and Syria,” is an example of how this authority continues to develop. President Obama issued the latest in a number of recent executive orders tightening Iranian and Syrian sanctions laws in an effort to increase the pressure on the two nations regarding issues such as weapons of mass destruction, terrorism support and human rights violations. It came on the heels of an April 23 executive order issuing sanctions on companies that provide information technologies that facilitate human rights abuses in the two countries.

The May 1 executive order gives OFAC the authority to publicly identify foreign individuals and entities that have violated, conspired to violate or caused a violation (even unknowingly) of U.S. sanctions against Iran and Syria, and to list them and block them from accessing the U.S. financial and commercial systems.

Huge Stick

“Unless there’s some relation to a U.S. company, OFAC doesn’t have jurisdiction over foreign companies, so here they tried to say, ‘We don’t have jurisdiction, but if we find out you’re helping other companies to evade the sanctions we have in place for Iran or Syria, we’re going to put you on this list,’” Lee says. “That’s a huge stick.”

A press release from the Treasury Department said the executive order would give it “additional means to impose serious consequences on foreign persons who seek to evade our sanctions.”

Lee says the May 1 order seems to be aimed at addressing the smaller and midsize exchange houses or Hawala organizations in the Middle East that are helping Iran and Syria get funding now that they are cut off from the U.S. financial system.

“The problem isn’t the big financial institutions; it’s these midlevel regional exchange houses that they’re trying to get at,” Lee says. “It’s also just a shot across the bow, not only to the exchange houses, but to anybody who still has business with Iran, and this is another way the president is trying to discourage those companies from doing business.”