December 13, 2013 –
$33 million OFAC settlement reveals importance of financial institutions’ self-disclosure

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) yesterday announced a $33 million agreement with Royal Bank of Scotland PLC (“RBS”) to settle the bank’s potential civil liability for apparent violations of U.S. sanctions. The settlement resolves OFAC’s investigation into payment practices used by RBS that interfered with the implementation of U.S. economic sanctions by financial institutions in the United States and resulted in apparent violations of U.S sanctions programs relating to Iran, Sudan, Burma and Cuba.

These apparent violations, which were determined by OFAC to be egregious, included removing material references to U.S.-sanctioned locations or persons from payment messages sent to U.S. financial institutions. With respect to Iran, for example, RBS accomplished this by developing written procedures to send payments that omitted information about the Iranian nexus in cover payments sent to U.S. financial institutions. The procedures instructed employees to list the actual name of the Iranian financial institution rather than the Bank Identifier Code in the beneficiary bank field of the payment instructions. Doing so prevented the RBS payment system from automatically including references to the Iranian bank or Iran in related cover messages, and resulted in the omission of that data from instructions sent to U.S. clearing banks. While the instructions were developed to handle payments involving Iran, RBS identified that similar methods were used for certain payments involving Sudan, Burma and Cuba as well.

RBS voluntarily self-disclosed all of these apparent violations under the terms of OFAC’s Economic Sanctions Enforcement Guidelines (“the Guidelines”). The statutory maximum penalty in this case was $132,489,228. The total base penalty amount under the Guidelines for all apparent violations was $66,244,614.

In reaching its determination that the above-referenced apparent violations were egregious, OFAC assessed RBS’ conduct under the Guidelines, and determined that:

• RBS’ conduct was reckless;
• Several members of RBS management responsible for managing and/or overseeing operations in the bank’s Global Correspondent Banking and Payment Operations units were aware of the conduct that led to the apparent violations;
• The apparent violations conferred significant benefit to persons subject to U.S. sanctions;
• RBS is a large, commercially sophisticated, global financial institution;
• RBS did not maintain adequate policies or procedures to ensure compliance with the sanctions programs administered by OFAC; and
• Any civil penalty should be commensurate with the seriousness of RBS’ conduct in order to achieve maximum future compliance effect and deter similarly situated financial institutions.

Importantly, mitigation was extended because:

1. RBS has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the apparent violations;
2. RBS provided substantial cooperation to OFAC; and
3. RBS took remedial action in response to the matters described above.

OFAC further reduced the proposed penalty in light of RBS’ agreement to settle its potential liability for the apparent violations.

The RBS settlement agreement, and specifically, the variation between the statutory maximum or base penalty and the settlement amount demonstrates the value of a financial institution’s self-disclosure to and cooperation with OFAC. Now, more than ever, is the time for financial institutions to review their BSA/AML/OFAC compliance programs to ensure that they comply with legal requirements as well as meet regulator expectations.

If you have any questions concerning your BSA/AML/OFAC compliance program or the contents of this alert, please contact Andy Fernandez, Gabriel Caballero or Stephanie Quiñones.

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