1. Michael J. Lowell October 21, 2015
Inside the Investigation and Prosecution of AML/BSA and Sanctions: Focus on Sanctions Enforcement
Michael J. Lowell
October 21, 2015

2. Agenda Background Legal Authorities Enforcement Principles
“Lessons Learned”
Trends
Key Takeaways

3. Background - OFAC Office of Foreign Assets Control (OFAC)
Administers and enforces economic sanctions programs
$30-31 million budget
170 people
Mostly lawyers and intelligence analysts – reviewing classified intel reports, financial records, corp. registration
Recognized by Congress as essential personnel for government shutdown

4. Background – Sanctions Programs
Cuba
Iran
Sudan
Syria
Counter Narcotics Trafficking
Counter Terrorism
Cyber-related
Non-proliferation
Rough Diamond
Transnational Criminal Organizations
Burma
Ukraine / Russia-related
North Korea
Venezuela
Balkans-Related Sanctions
Belarus Sanctions
Central African Republic
Cote d’Ivoire (Ivory Coast)
Democratic Republic of Congo
Iraq
Lebanon
Former Liberian Regime
Libya
Magnitsky
Somalia
South Sudan
Yemen
Zimbabwe

5. Legal Authorities Legal Framework
International Emergency Economic Powers Act, 50 U.S.C. Section (“IEEPA”)
Trading With the Enemy Act, 50 U.S.C. Section 5 (“TWEA”)
31 C.F.R. 510 – 598
Various statutes and executive orders
Reporting, Procedures and Penalties Regulations
31 C.F.R. 501
OFAC Enforcement Guidelines
74 Fed. Reg (November 9, 2009)
OFAC Civil Penalties and Enforcement Information

6. Legal Authorities - Penalties
Trading with the Enemy Act - $65,000
International Emergency Economic Powers Act (IEEPA) - $250,000 or 2x the value of the transaction
Foreign Narcotics Kingpin Designation Act - $1,075,000
Criminal Penalties
$1 million or 2x value; imprisonment
Larger penalties under Kingpin Act
Other Consequences:
Revoked licenses
Debarment
Liability for related violations
Reputational risks

7. OFAC Sanctions Penalties & Enforcement: Enforcement Principles
What Triggers an Investigation?
Self disclosures
Blocking and reject reports
Current investigations
Agency referrals
Publicly-available information
Informants
ISIS Toyota Trucks

8. OFAC Sanctions Penalties & Enforcement: Enforcement Principles
Strict liability
Civil penalties may be imposed on a strict liability basis
In the matter of: Aluminum Company of America, 64 FR (Aug. 5, 1999) (finding that “liability and administrative sanctions are imposed on a strict liability basis once the Respondent commits the proscribed act'')
Iran Air v. Kugelman, 996 F.2d 1253 (D.C. Cir. 1993) (knowledge is not an “essential element of proof for the imposition of civil penalties'').
Risk-based compliance
“OFAC agrees that financial institutions should take a risk-based approach when considering the likelihood that they may encounter OFAC issues.” -
OFAC will consider “an institution’s risk-based compliance program in assessing the appropriate enforcement response” – 74 FR at (Nov. 9, 2009)

9. OFAC Sanctions Penalties & Enforcement: Enforcement Responses
Criminal Referral
Civil Penalty
Finding of Violation
Cautionary Letter
No Action
Types of Responses
Anywhere from 750 – 1,000 open inquiries at any time
Average closure of a few hundred each year with “no action” or “cautionary letters” (cautionary letter is the most common response)
“No Action” – insufficient evidence to conclude that a violation has occurred or does not warrant administrative response based on General Factors
“Cautionary Letter” – insufficient evidence to conclude that a violation has occurred or finding of violation/penalty is not warranted, but conduct may lead to violation or person is not exercising due diligence in compliance
“Finding of Violation” - OFAC

10. OFAC Sanctions Penalties & Enforcement: Enforcement Responses – General Factors
Willful or Reckless Violation
Awareness of Conduct
Harm to Sanctions Objectives
Individual Characteristics:
Commercial Sophistication
Size of Operations
Financial Conditions
Volume of Transactions
Sanctions History
Compliance Program
Remedial Response
Cooperation with OFAC
Timing of Apparent Violation
Other Enforcement Action
Future Compliance / Deterrence Effect
Other Relevant Factors
Totality of Circumstances
Every enforcement case officer will have the guidelines on their desk
Every case requires a memo addressing each of these factors
Characteristics of the Violator
Individual characteristics
Compliance program
Cooperation
Previous enforcement
Future compliance / deterrence effect
Characteristics of the Violation
Willful or reckless
Sanctions harm
Timing of violation
Remediation
Awareness of conduct
Source: 74 Fed. Reg (November 9, 2009)

11. OFAC Sanctions Penalties & Enforcement: Enforcement Penalties

12. OFAC Sanctions Penalties & Enforcement: Enforcement Penalties

13. OFAC Sanctions Penalties & Enforcement: Enforcement Principles
Base Calculation of Civil Penalties Under U.S. Law
Not Egregious
Egregious
Voluntary Self-Disclosure
One-half of Transaction Value (capped at $125,000 per violation/$32,500 per TWEA violation)
One-Half of Applicable Statutory Maximum
No Voluntary Self-Disclosure
Applicable Schedule Amount (capped at $250,000 per violation/$65,000 per TWEA violation)
Applicable Statutory Maximum
Source: 74 Fed. Reg , (2009).

14. OFAC Sanctions Penalties & Enforcement: Enforcement Principles
Application to Enforcement Cases ( )
Not Egregious
Egregious
Voluntary Self-Disclosure 21
Total: $13,312,009 8
Total: $944,800,569
No Voluntary Self-Disclosure 54
Total: $25,641,080 15
Total: $1,863,505,906
Source: 74 Fed. Reg , (2009).
* Double-counts cases where some penalties egregious and some non-egregious; does not reflect cases where OFAC did not make a finding on the issue

15. OFAC Sanctions Penalties & Enforcement: Enforcement Principles
Voluntary Disclosure
Self-initiated notification to OFAC of an apparent violation prior to or at the same time that OFAC or any federal, state, or local government agency or official discovers the apparent violation or another substantially similar apparent violation
Not a voluntary disclosure if:
Apparent violation already discovered by government
Series of similar apparent violations or related to the same practice or pattern of conduct
Third-party is required to and does notify OFAC because of blocked or rejected transaction (regardless of when notification was received)
Contains false or misleading information
Materially incomplete
Not self-initiated
Whistleblower
“Apparent violation” – conduct that constitutes an actual or possible violation of sanctions

16. OFAC Sanctions Penalties & Enforcement: Examples of Egregious Cases
MSB screening and flagging 136 transactions for $7,091, but dismissing flags 6 times because employees didn’t understand flags or process
Non-profit transferred $236,000 to Iraq; OFAC put the non-profit on notice of violations and president approved
Foreign bank processed thousands of transactions through U.S. financial institutions for sanctions targets; management was aware of conduct and exercised “reckless disregard” for sanctions; transactions harmed sanctions objectives
Large U.S. Bank demonstrated ”reckless disregard” for sanctions requirements
At least one official with sanctions responsibility identified a deficiency that prevented the bank from identifying potential matches to individuals with multiple or multi-part names
It took more than 2 years to address the deficiency
Particularly serious violation calling for a strong enforcement response
Substantial weight to General Factors A, B, C, and D
Egregious
Willful or reckless violation of law
Awareness of conduct
Harm to sanctions Objectives
Individual Characteristics
Bank of America was the bank
Appx 208 transactions for about $91,000; only a portion were egregious (post-discovery of deficiency in 2006)

17. OFAC Sanctions Penalties & Enforcement: Enforcement Principles
Percentage of Base Penalty Imposed ( )
Not Egregious
Egregious
Voluntary Self-Disclosure
Average: 68%
Range: 31% - 161%
* Two cases had an increase
Average: 72% Range: 35% - 144%
* Only one case had an increase
No Voluntary Self-Disclosure
Average: 55%
Range: 4% - 135%
* One case had an increase
Average: 75% Range: 3% - 310%
Source: 74 Fed. Reg , (2009).
Reflects that enforcement penalties can be “more art than science”
Does not reflect significant number of cases closed out with no penalty
Outlier numbers typically reflect very large or very small overall penalties

18. OFAC Sanctions Penalties & Enforcement: Penalty Per Apparent Violation

19. OFAC Enforcement: The Role of the Compliance Program
No mandatory compliance program
Risk-based
General factor affecting administrative action
Key elements:
Commitment to Compliance
Risk Assessment
Awareness & Training
Internal Controls
Responsible Person(s)
Monitoring/Audits

20. Applying “Lessons Learned”: Gaps in Screening – Calibration / Keywords
Identification of key sanctions-related keywords
Burmese, Cuban, Iranian, Sudanese, Tehran, Khartoum, etc.
Acronyms
“BMICJSCMOSCOWRUSSIA”
Multiple names
Example: Carlos Alberto Sanchez Osuna
Name variations
Example: “Higher Institute for Applied Science and Technology” vs. “Higher Institute of Applied Science and Technology”
In-process transactions

21. Applying “Lessons Learned”: Gaps in Screening – Match Resolution
Match escalation
Does the match indicate why it was flagged?
Does the recipient know what to do with it?
Further prevention
Block implemented, then what?
Testing internal controls
Fix deficiencies
Evaluate relationships

22. Applying “Lessons Learned”: Customer / Supplier / Distributor Due Diligence
Incorporate information / expand vetting:
Utilizing all information in possession (e.g., customer profile)
Documents you receive
Payment instructions
“Public domain”
Distributor / partner markets
Evaluate relationships
Review the documents you receive
Citi Penang - $217,841 (September 2014)
Review information about your supplier in the “public domain”
ESCO Corporation - $2,057,540 (November 2014)
Review information about your end users in the “public domain”
Indam International - $44,850 (October 2014)
Review your distributor’s markets
Epsilon - $4,073,000 (July 2014)

23. Applying “Lessons Learned”: Decision-making, Management, and Participation
U.S. person approvals / supervision
Foreign persons in the United States
Technical support and repairs
Coordination and involvement of U.S. person
Successor Liability
Schlumberger Oilfield Holdings Ltd. (“SOHL”) (British Virgin Islands) entered guilty plea and agreed to $232.7 million in financial penalties
Charge: Conspiring to willfully facilitate transactions and engage in trade with Iran and Sudan, in violation of the International Emergency Economic Powers Act (“IEEPA”)
Most of the conduct occurred outside of the U.S. but company maintained Texas business unit that approved the conduct
$155 million criminal fine, the largest criminal fine ever assessed in connection with an IEEPA prosecution
Weatherford & World Fuel Services
There is no transition period.
“U.S. persons acquiring entities outside the United States should consider OFAC compliance as part of their due diligence review of the acquisition.”
Dal-Tech Devices, Inc. (Jan. 18, 2013)
Ellman International, Inc. (Jan. 2, 2013)

24. OFAC Sanctions Penalties & Enforcement: OFAC Investigation Trends

25. OFAC Sanctions Penalties & Enforcement: OFAC Monetary Penalty Trends

26. OFAC Sanctions Penalties & Enforcement: Trends
“Instead of being a secondary measure, as in the past, economic sanctions have become a centerpiece of national security policy.” - Washington Post (March 23, 2011)
Libya Protests Begin
(February 15, 2011)
Executive Order 13566
(February 25, 2011)
Pro-Russian Protests in Ukraine
(February 23, 2014)
Executive Order 13660
(March 6, 2014)

27. OFAC Sanctions Penalties & Enforcement: Trends
In the fiscal year, which ended on Sept. 30, U.S. law enforcement officials filed fresh charges just twice against those suspected of attempting to smuggle weapons and related technology from the United States to Iran, according to court records.
Eight such cases were brought in By comparison, around 10 to 12 such cases were brought in each of the preceding six years
The official added there was already a "reticence" in some agencies and U.S. federal prosecutors' offices to pursue the cases because they are so tough to build and time-consuming.
"And if we're going to normalize things with Iran soon, people are asking, 'Is it worth it?'"

28. OFAC Sanctions Penalties & Enforcement: Trends
OFAC did not authorize “new investment” and “financial services” for Burma until July 11, 2012 – following announcement 2.5 months earlier
OFAC Iran sanctions changed reported as changing almost one year ago – November 2013
Cuba sanctions – more than one month delay; and still not clear from headline

29. OFAC Sanctions Penalties & Enforcement: Trends
“[T]he purpose of enforcement action includes raising awareness, increasing compliance, deterring future violations, and not merely punishment of prior conduct.” - Enforcement Guidelines, 74 Fed. Reg. at
Stainless steel pipes
Car stereo
Duct fabrication system
Recreational law chairs
Frozen passion fruit juice
Nickel briquettes

30. Key Takeaways
Test your screening process for gaps; test screening match escalation
Utilize information about your customers / suppliers / partners
Risk assessments
Change creates risk – consider communication within your organization
Address known deficiencies quickly
Use the Enforcement Guidelines
Reactive vs. Proactive
Reactive vs. Proactive – almost as valuable – maybe more valuable – how you respond to violations

31. Michael J. Lowell
Co-Chair of the firm’s Anti-Money Laundering and Trade Sanctions Group
Counsels clients on trade and regulatory enforcement matters, including export controls, economic sanctions, anti-money laundering, anti-bribery, and other laws governing cross-border transactions
Advises multinational companies from a wide range of industries, including financial services, defense and aerospace, manufacturing, life sciences, and energy and natural resources.
Focuses on the legal regimes that govern international trade, including:
Sanctions administered by the Office of Foreign Assets Control (“OFAC”)
Export controls, including the Export Administration Regulations ("EAR") and International Traffic in Arms Regulations ("ITAR")
Foreign Corrupt Practices Act (“FCPA”)
Washington, D.C.