October 22, 2015
Export Controls and Economic Sanctions Alert
Author(s): Alexandra Lopez-CaseroThis alert was co-authored by Anjali Vohra.
This week, the U.S. Department of the Treasury published the first settlement agreement between its Office of Foreign Assets Control (“OFAC”) and a large financial institution since the historic “nuclear deal” with Iran that was meant to curb the Iran sanctions. The settlement with French-based Crédit Agricole Corporate and Investment Bank (“Crédit Agricole”), the corporate and investment banking arm of Crédit Agricole S.A., is part of a global settlement among OFAC, Crédit Agricole and various federal and New York agencies. Notably, the largest portion of the fine was not imposed by OFAC but by the New York State Department of Financial Services. Moreover, OFAC agreed not to collect its portion in light of the $787.3 million penalties imposed by the other agencies.
The settlement agreement with OFAC provides valuable background on this case, detailing the actions of Crédit Agricole and its subsidiaries from 2003 to 2008. According to the settlement agreement, Crédit Agricole maintained accounts for and processed thousands of USD transactions to and through U.S. financial institutions on behalf of sanctioned countries and persons. Crédit Agricole apparently implemented policies and procedures directing employees to omit references to sanctioned countries in financial transaction records, which prevented U.S. financial institutions from identifying unlawful transactions.
These policies and procedures were apparently approved by high level legal and compliance personnel. The legal department of a Geneva subsidiary determined that it was not subject to U.S. and other non-Swiss sanctions laws, and received informal confirmation of this interpretation of U.S. sanctions laws from a regional banking association in 1996 and 2001. In 2004 it created a separate unit primarily responsible for sanctions compliance, which adopted this interpretation of the U.S. sanctions laws and emphasized the need to ensure that outgoing payment messages to U.S. financial institutions did not include sanctions-identifying information.
According to the settlement agreement, Crédit Agricole received several informal warnings that its understanding of U.S. sanctions laws was incorrect. Its New York branch apparently blocked several transactions from the Geneva subsidiary and provided additional information regarding U.S. sanctions. The New York branch apparently also notified the head office in Paris, which distributed a memorandum explaining that OFAC embargoes are also applicable indirectly to all USD transactions, even when performed outside of the U.S. Still, the bank apparently failed to seek additional guidance or verification as to its interpretation of the U.S. sanctions requirements. Crédit Agricole employees, including legal and compliance personnel, apparently insisted that Crédit Agricole was not subject to the U.S. sanctions programs and continued to direct employees to evade U.S. sanctions. For example, on February 2, 2004, a back office analyst wrote:
Various payments of ours were stopped by the U.S. banks, because within the text body of our instructions … certain words such as Iraq, Iran, etc. were used, words which appear on the U.S. Banks [sic] automatic block list. Consequently, be vigilant and do not put too much detailed information in your payments, thus avoiding costly back values.
In May 2004, prior to the transfer of Crédit Lyonnais’s corporate and investment banking activities (including employees) to Crédit Agricole’s Swiss subsidiary (“CAS”), Crédit Lyonnais’s head office asked CAS to terminate its business relationships with a Sudanese bank, noting that it was a blacklisted bank. A senior commercial bank manager at CAS expressed his disagreement and emphasized the importance of this relationship:
[The Sudanese bank’s] considerable liquidity in our books … provides considerable coverage for the commitments as well as for the commercial payments…. It is essential that this relationship be maintained with this bank, that we know very well, that we visit in Sudan and which visits us regularly, and whose employees have for many years now been trained by us on the business of letters of credit/transfers/forex.
Meeting notes related to CAS’s Sudanese business stipulated that shortly after the merger the Swiss subsidiary had closed all non-Swiss correspondent accounts and conducted its last USD transaction related to the Sudanese correspondent accounts. However, according to the settlement agreement, these activities actually continued because Crédit Agricole employees apparently did not believe they were subject to non-Swiss laws.
Crédit Agricole processed over $32 billion in USD payments on behalf of Sudanese, Iranian, Burmese and Cuban entities, according to the settlement agreement, by intentionally omitting identifying information. In addition to internal directions to omit references to sanctioned countries, Crédit Agricole also received requests from employees to omit such information. For example, Crédit Agricole’s Geneva subsidiary received and complied with the following request from a Sudanese bank client: “DON’T MENTION SUDAN ON THIS PAYMENT ORDER.”
Most of the apparent violations involved Crédit Agricole’s Swiss subsidiaries and their predecessors for Sudanese-related transactions. Crédit Agricole’s branches in Paris, London, Hong Kong, Singapore, Dubai and Bahrain apparently were involved in additional violations of Cuba, Burma, and Iran sanctions.
OFAC determined that the apparent sanctions violations constituted an egregious case. This is a deciding factor as to why OFAC proposed a $329.6 million penalty. Generally, whether a violation is deemed “egregious” is based on several factors, such as whether the conduct was willful or reckless, the level of awareness within the company and the level of harm done to the U.S. sanctions program. In this case, OFAC found that Crédit Agricole had ignored indications that its conduct may violate U.S. laws, and that several managers, including those in its Swiss locations and Paris’s head office, were aware of the conduct. OFAC also claimed that Crédit Agricole’s actions caused significant harm to U.S. sanctions programs and policy objectives. Interestingly, OFAC also determined that the violations “were not voluntarily self-disclosed to OFAC within the meaning of OFAC’s Economic Sanctions Enforcement Guidelines.” While voluntary self-disclosures are generally not publicly available, this could indicate that Crédit Agricole did submit a voluntary self-disclosure, but that OFAC refused to give the company credit for it. This usually happens when OFAC learns of a violation before a company submits its self-disclosure or if OFAC learns of material information that was not contained in the self-disclosure and thus considers the self-disclosure to be incomplete.
The following were considered mitigating factors:
Under the settlement agreement, Crédit Agricole agreed to pay $329.6 million to OFAC for potential civil liability arising out of the apparent violations, which notably OFAC agreed will be deemed satisfied by Crédit Agricole’s payment of penalties assessed by federal and local New York agencies. Those penalties total $787.3 million, including $385 million to the New York State Department of Financial Services, $90.3 million to the Federal Reserve, $156 million to the Manhattan District Attorney’s Office and $156 million to the U.S. Attorney’s Office for the District of Columbia.
Crédit Agricole also entered into deferred prosecution agreements with the Justice Department and Manhattan district attorney’s office. Under these agreements, Crédit Agricole admitted criminal wrongdoing, agreed to take remedial steps such as adopting better safeguards and promised not to commit further violations. If Crédit Agricole abides by the terms of the settlements for three years, the criminal charges will be dropped.
This case highlights that the financial sector and non-U.S. companies continue to be at high risk for OFAC enforcement cases. It also underscores the need for a robust compliance program, the high compliance expectations placed on firms, the benefit of timely and complete voluntary self-disclosures (which generally cut a potential OFAC penalty in half) and the extraterritorial reach of the U.S. sanctions programs.
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