Who Gets Caught Violating U.S. Economic Sanctions? Trends in OFAC Enforcement Actions from 2003 – 2015
Posted on: 5th April 2016, Re-posted on: May 17, 2018
By: Bryan R. Early, Ph.D., Associate Professior, University at Albany, SUNY*
The United States employs economic sanctions more than any other country in the world. For companies, keeping up with all the sanctions obligations imposed by the U.S. Government can be a significant challenge and burden. It can also be a costly burden if ignored. In 2014 and 2015, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) collected approximately $1.2 billion and $600 million from companies in sanctions-related penalties.To date, there have not been any systematic efforts to analyze which parties OFAC takes enforcement actions against for violating U.S. sanctions. This report explores trends in sanctions enforcement actions undertaken OFAC from 2003-2015. The trends reveal significant variation in the number of enforcement actions undertaken during the Bush and Obama Administrations, but also interesting differences in which sectors’ companies are most frequently penalized, where they are located, and what sanctions programs they allegedly violated. (more…)
OFAC penalties and enforcement actions show greater focus on violations linked to weapons of mass destruction
Date: March 19, 2016
An enduring consequence of the horror inflicted by the terrorist attacks of September 11, 2001, is the dread that a future terrorist attack on the United States could involve “weapons of mass destruction.” (more…)
Deutsche Bank Settles OFAC Violations with $258 Million Payment, Monitor and Termination of Employees
Author: Bruce Zagaris
Date: January 8, 2015
On November 4, 2015, the New York State Department of Financial Services (NYDFS) and the U.S. Department of the Treasury entered into a settlement agreement with Deutsche Bank.1 Deutsche Bank agreed to pay an overall $258 million penalty, including $200 million to the NYDFS and $58 million to the Federal Reserve. Deutsche Bank (DB) agreed to have NYDFS appoint an independent monitor for one year and to fire six employees the NYDFS has said were involved in the misconduct.2 (more…)
New York State Department of Financial Services Suspends and then Settles with Promontory For Its Work on Standard Chartered
Author: Bruce Zagaris
Date: January 8, 2016
In August 3, 2015, the New York State Department of Financial Services (DFS) issued a report criticizing the work of Promontory Financial Group LLC as a monitor of Standard Chartered Bank and suspended Promontory from conducting most assignments for banks that are licensed in New York State and suspected of wrongdoing.1 However, Promontory has disputed the findings in the report and accused the DFS of “regulatory overreach” and conflicts of interest.2
On August 18, 2015, the DFS and Promontory entered into a settlement agreement.3
1. The DFS Report
The DFS report concerns an investigation of DFS on September 4, 2013 of Promontory’s reports prepared and submitted to DFS in 2010-2011 containing the findings of its review of certain transactions by Standard Chartered.
After an extensive, two-year investigation by DFS, including the collection and review of thousands of documents, the taking of sworn testimony of five current and two former employees of Promontory, including two managing directors and the Chief Operating officer, and the review of four written submissions made by Promontory’s counsel over the course of the investigation.
The DFS concluded that “Promontory exhibited a lack of independent judgment in the preparation and submission of certain reports to the Department in 2010-2011…” As a result, the DFS has decided to deny Promontory access to confidential supervisory information pursuant to New York State Banking Law § 36(10). Essentially, the DFS has suspended Promontory from any monitor’s work before the DFS.
Pursuant to a March 10, 2009 Agreement between Standard Chartered and Promontory, Promontory agreed to provide “general advice in relation to sanctions compliance and regulatory relations issues.” On July 16, 2009, Promontory contracted with the Standard Chartered’s counsel to provide “consulting services in connection with the identification and collection of historical transaction records relating to cross-border financial transactions.”
In the first half of 2010, Standard Chartered reported to various regulators, including the New York State Banking Department (NYSBD), the DFS’s predecessor, that it had engaged in conduct related to the evasion of U.S. sanctions. On April 15, 2010, Standard Chartered’s counsel engaged Promontory to identify, collect and review historical transaction records “with certain countries or certain Specially Designated Nationals (SDNs) subject to sanctions” administered by OFAC. The engagement was known as Project Green, in which Promontory earned $54.5 million in total revenue for its work and an additional $12.4 million in total revenue from work on other Standard Chartered engagements from 2007-2014.
In connection with DFS’s investigation of Standard Chartered, the DFS relied in part upon the work conducted and presented by Promontory to identify the scope of the Bank’s improper conduct and to determine an appropriate resolution of the investigation. On September 21, 2012, Standard Chartered and the Department executed a Consent Order pursuant to New York Banking Law § 44, resolving charges that, from at least 2001 through 2007, Standard Chartered provided U.S. dollar clearing services to Iranian customers subject to U.S. economic sanctions, with respect to approximately 59,000 transactions totaling approximately $250 billion, through the Bank’s New York-licensed branch. As a result of Standard Chartered’s wrongdoing (e.g., by removing or omitting information identifying sanctioned counterparties from prior payment messages through the use of wire-stripping and cover payments to conceal its unsafe and unsound conduct from regulators), the Department issued a 2012 Order. The Order required Standard Chartered to pay a penalty of $340 million and to install an independent on-site monitor, for a period of two years, to examine and evaluate Standard Chartered’s BSA/AML compliance programs, policies and procedures.
Following the 2012 Order, Standard Chartered engaged the required monitor, which identified failures with respect to the Bank’s BSA/AML transaction monitoring systems that the Bank had not disclosed to the Department prior to the 2012 Order. Accordingly, on August 19, 2014, Standard Chartered and the Department entered into a second Consent Order, pursuant to which Standard Chartered suspended certain U.S. dollar clearing through its New York branch, paid an additional $300 million penalty, extended the term of the monitor for two years and agreed to take additional remediated steps.4
The DFS report criticizes Promontory for exhibiting a lack of independent judgment in the preparation and submission of reports. The DFS report states that, although Promontory was supposed to be independent and transparent, on numerous instances Promontory, at the direction of the Bank or its counsel, or at its own initiative, made changes to “soften” and “tone down” the language used in its reports, avoid additional questions from regulators, omit red flag terms or otherwise make the reports more favorable to the Bank.5 In particular the DFS report states that Promontory’s language changes from its draft did not convey the fact that certain types of transactions failed to convey the fact that such transactions reflected failures of the Bank’s compliance systems. DFS found that the removal or omission of certain information, such as the omission of certain timelines from the reports, would have indicated an increase in violations over time. In addition, at the request of the Bank’s counsel, Promontory rephrased a category of transactions, originally referred to as “potential violations,” to a much longer, more ambiguous and innocuous phrase – “payments with a US nexus for which no exemption or potential violation has been identified.” Promontory also, at the behest of a Managing Director, changed a heading from “New Potential Violations” to “Highlights of Changes.”6
2. Promontory’s Response
On August 3, 2015, Promontory issued a statement in response the DFS action. It states that Promontory will seek a stay of the DFA action in New York State Supreme Court and defend itself against what is characterized as “regulatory overreach.” It said it stands behind the integrity of its professionals and the quality of its work, the accuracy of which the order does not dispute.7
The release said it believes the DFS has “willfully misconstrued out work based on a handful of emails taken out of context”. Promontory reviewed approximately 131,000 Standard Chartered transactions from 2001 to 2007 totaling more than $590 billion. According to the press release, the two-year-long DFS investigation identified “no substantive errors.”
The press release said that, after reviewing the matter with outside counsel, and thoroughly reviewing how it performed the work, Promontory is “convinced that an impartial review of the facts will show that our professionals acted all times with appropriate independence and unwavering commitment to actual accuracy.”
The settlement agreement provides as follows: Promontory will pay $15 million; Promontory agrees to a 6-month voluntary abstention from new consulting engagements that require the Department to authorize the disclosure of confidential information under New York Banking Law §36(10); Promontory agrees that, in certain instances, its actions during the Standard Chartered engagement did not meet the Department’s current requirements for consultants performing regulatory compliance work for entities supervised by the Department; and Promontory acknowledges that any report it submits to the Department must be objective and reflect its best independent judgment. In all pending and future matters in which it or its client submits a report to the Department, Promontory will document any changes to such a report that it makes at the suggestion of a client or the client’s counsel.
However, Promontory did not admit any wrongdoing. The agreement enabled DFS to avoid a potential challenge to its authority to issue findings against an entity it does not regulate.
Acting Superintendent Albanese said: "We are pleased that Promontory has agreed to resolve this matter and to work constructively with the Department moving forward to help strengthen integrity within the consulting industry. The Department will continue to aggressively investigate and address conflicts of interest at consulting firms, which is a critical part of combating misconduct and improving accountability in the financial markets."8
Paul Shechtman, esq., Zuckerman Spaeder and Promontory's lawyer, said that "throughout the negotiations, Promontory insisted that it would not admit it lacked independence, integrity and autonomy--the words in prior agreements. The matter did not settle until it was agreed those words weren't required."9
This is the third recent action taken by the DFS against a monitor. On June 8, 2013, Deloitte agreed to a one-year, voluntary suspension from consulting work at financial institutions regulated by DFS, agreed to make a $10 million payment to the State of New York, and implement a set of reforms designed to help address conflicts of interest in the consulting industry. Deloitte agreed to establish and implement a new set of safeguards to address conflicts of interest in the consulting industry: disclosure of past work during the prior three years; declaration of independence provision in the consulting letter between the consultant and financial institution; anti-tampering provisions, requiring disclosure to DFS of any disagreement over a material matter between the consultant and the financial institution; records of recommendations financial institutions failed to implement ('anti-sweeping-under-the-rug' provision); and monitoring the monitor, independent lines of communication, whereby DFS will meet regularly at least monthly with the independent consultant. DFS intends to use these standards as a new model that will govern independent consulting firms that seek to be retained or approved by DFS.10
The problem of the independent monitor becoming too close to the corporation is illustrated by a recent case involving the New York State Department of Financial Services (NYDFS) and PricewaterhouseCoopers (“PwC”). On August 19, 2014, Benjamin M. Lawsky, Superintendent, NYDFS, announced that PwC Regulatory Advisory Services would be suspended for 24 months from accepting consulting engagements at financial institutions regulated by the NYDFS; make a $25 million payment to the State of New York; and implement a series of reforms after improperly changing a report submitted to regulators regarding sanctions and anti-money laundering compliance at the Bank of Tokyo Mitsubishi (BTMU). PwC removed a warning in an ostensibly “objective” report to regulators surrounding the Bank’s scheme to falsify wire transfer information for Iran, Sudan, and other sanctioned entities.11
A lengthy NYDFS investigation found that PwC, after pressure from BTMU executives, improperly revised an “historical transaction review” (HTR) report submitted to regulators on wire transfers that the Bank performed on behalf of sanctioned countries and entities. During the 11th month (May 2008) of a 12-month engagement (June 2007 to June 2008), PwC found that BTMU had issued special instructions to Bank employees to strip wire messages of information that would have triggered sanctions compliance alerts. Only weeks before, in a meeting with regulators, BTMU denied having such a policy. PwC understood that this improper data manipulation could significantly compromise the HTR’s integrity. PwC inserted into an earlier draft of the report an express acknowledgment informing regulators that “had PwC know about these special instructions at the initial Phase of the HTR then we would have used a different approach in completing this project. In particular, PwC would have done a more in-depth, forensic investigation into BTMU’s scheme instead of a more rote, mechanical review of the transactions provided to it by BTMU.” In other words, the discovery of BTMU’s scheme to falsify wire transfer information, among other issues, cast doubts on whether PwC had a complete set of data to review.12
At BTMU’s request, PwC removed the original warning language from the final HTR Report the Bank delivered to regulators. In fact, it inserted a passage stating the opposite conclusion: “e have concluded that the written instructions would not have impacted the completeness of the data available for the HTR and our methodology to process and search the HTR data was appropriate.” Additionally, at BTMU’s request, PwC removed other critical information from drafts of the HTR Report, such as deleting the English translation of BTMU’s wire stripping instructions, deleting a regulatory term of art that PwC used throughout the report in describing BTMU’s wire-stripping instructions and replacing it with a nondescript reference that lacked regulatory significance, deleting most of PwC’s discussion of BTMU’s wire-stripping activities, and deleting information concerning BTMU’s potential misuse of OFAC screening software in connection with its wire-stripping activities.
According to the Superintendent of Financial Services, a PwC Director who led the firm’s technology and data collection team, and presently a PwC partner, sent emails to PwC partners and employees, expressing his apparent concern for client satisfaction over the need for objective inquiry. NYDFS states that no one at PwC reprimanded or even told the Director that his comments were inappropriate, which incidentally compromised the firm’s objectivity.13
During its suspension, PwC has implemented a series of reforms to help address conflicts of interest in the consulting industry. These reforms are modeled on the above-mentioned similar agreement NYDFS reached with Deloitte.14 Among other things, PwC must develop a comprehensive training program regarding the requirements of New York Banking Law §26(10) governing confidential supervisory information, and must provide such training to all of its partners, principals and employees assigned to engagements in which it is expected that PwC will have access to materials covered by New York Banking Law §36(10). PwC Regulatory Advisory Services must draft, in consultation with NYDFS, a handbook providing guidance as to what materials are covered by the New York Bank Law §36(10) governing confidential supervisory information and how such materials should be handled. NYDFS must approve the final version of the handbook.15
The Washington Post reported that the PwC settlement was part of a broader investigation into the consulting industry’s relationship with Wall Street. Consultants are obligated to work at the behest of government regulators to provide objective assessment of a firm’s problems.16
Settlement talks broke down before DFS’s announcement. Promontory had offered to pay a settlement of about $20 million but refused to agree to an admission of wrongdoing or a suspension, according to a media report. Meanwhile, DFS apparently was asking for $15 million plus an admission of wrongdoing and suspension.17
The settlement is a win-win for both parties.
According to the New York Times, Paul Schechtman, counsel for Promontory, asked DFS to recuse itself and have another government authority handle the investigation because it had a conflict. The conflict arises from Benjamin M. Lansky, the DFS’s former head, leaving the DFS to form his own consulting firm. Hence, Schechtman contends any action against promontory would “directly benefit” Lawsky’s new firm.18
The threatened lawsuit would have brought new attention to the lack of precise rules concerning consultants representing financial institutions before regulatory agencies. They are required to be independent and yet they are selected and paid by the financial institutions they represent.19
In the context of criticism by regulators, the consulting industry has defended its work. Some consulting firms have noted that, at least in certain cases, they do not claim to operate as “independent consultants.” Nevertheless, consultants normally promise government authorities that they adhere to industry standards requiring impartiality.20
As a result of this and other recent disputes between the DFS, other regulators and monitors, the American Bar Association’s Criminal Justice Section has adopted a resolution about the conduct of monitors. Among other things it requires that the monitor be independent of both the host organization and the government. To be independent, the monitor “should be impartial and objective in all of its activities, and avoid any conduct that may impair, or appear to impair, the Monitor’s impartiality and objectivity.”21 The resolution also calls for the monitor to adhere to professional codes and to properly supervise its employees.
The controversy between DFS and Promontory highlights the extent to which regulatory authorities and law enforcement depend on the private sector to intermediate and bring compliance, thereby subjecting intermediaries to difficult challenges and increased scrutiny.
This article is reprinted from 31 IELR 297 (Aug. 2015).
Bruce Zagaris is partner with the law firm of Berliner, Corcoran & Rowe, LLP. He can be reached at email@example.com.
1. New York State Department of Financial Services, Report on Investigation of Promontory Financial Group, LLC (Aug. 2015).
2. Ben Protess and Jessica Silver-Greenberg, Promontory Consulting Is Suspended by New York, N.Y. Times, Aug. 4, 2015, at B1, col. 1.
3. In the Matter of Promontory Financial Group, LLC, NY DFS, Agreement; DFS, Statement by Acting New York Superintendent of Financial Services Anthony J. Albanese on Agreement with Promontory Financial Group LLC , Press Release, Aug. 18, 2015 http://www.dfs.ny.gov/about/press/pr1508181.htm
4. Report on Investigation of Promontory Financial Group, LLC, supra.
5. Id. at 5-6.
6. Id. at 6-10.
7. Promontory Financial Services, Promontory to Seek Stay of NYDFS Action, Aug. 3, 2015 http://www.promontory.com
8. DFS, Statement by Acting New York Superintendent of Financial Services Anthony J. Albanese on Agreement with Promontory Financial Group LLC , supra.
9. Christopher M. Matthews, Promontory Settles With NY Regulator on Standard Chartered Investigation – Update, Morningstar, Aug. 18, 2015.
10. Office of Governor of New York, Cuomo Administration Reaches Reform Agreement With Deloitte Over Standard Chartered Consulting Flaws, Press Release, June 18, 2013 https://www.governor.ny.gov/news/cuomo-administration-reaches-reform-agreement-deloitte-over-standard-chartered-consulting-flaws
11. New York Department of Financial Services, NYDFS Announces PriceWaterhouseCoopers Regulatory Advisory Services Will Face 24-Month Consulting Suspension; Pay $25 Million; Implement Reforms After Misconduct During Work at Bank of Tokyo Mitsubishi, Aug. 19, 2014. NYSDFS In the Matter of PricewaterhouseCoopers LLP, Settlement Agreements (available on the NYDFS website).
14. Id. Exhibit B to NYSDFS In the Matter of PricewaterhouseCoopers LLP, Settlement Agreements.
15. Exhibit B, id.
16. Danielle Douglas, Pricewaterhouse to pay $25 million fine, Wash. Post, Aug. 9, 2014, at A9, col. 5.
17. Michael Rapoport and Rachel Louise Ensign, N.Y. State Suspends Promontory From Some Consulting Work, Wall St. J., Aug. 3, 2015
18. Protess and Silver-Greenberg, supra.
20. Ben Protess and Jessica Silver-Greenberg, New York Escalates Investigation Into Promontory Financial Group, N.Y. Times, July 20, 2015.
21. American Bar Association, Criminal Justice Section, Monitor Standards (2015).