Recent OFAC Activity of Interest to Companies Participating in International Exports

March 17, 2006

The Office of Foreign Assets Control ("OFAC") has recently taken four actions of potential interest to companies participating in international exports:

  • First, OFAC recently codified the Syrian sanctions regulations that had been imposed by a 2004 Executive Order.
  • Second, President Bush has just issued an Executive Order imposing sanctions against the Cote d’Ivoire.
  • Third, the Federal Register has published OFAC’s new Economic Sanctions Enforcement Procedures for Banking Institutions.
  • Fourth, the U.S. parent of ABN AMRO has been assessed stiff penalties for its overseas branches’ lack of adequate export compliance and maintenance programs.

OFAC Codifies Syrian Sanctions Regulations in the CFR

OFAC recently adopted a new Code of Federal Regulations part that implements the Syrian sanctions regulations, which were previously codified only in Executive Order 13338.  New Part 542 blocks the property of all individuals who have been directing or significantly contributing to the Syrian Government’s (1) provision of safe haven to or support for any person whose property or interests in property are blocked under U.S. law for terrorism-related reasons, (2) military or security presence in Lebanon, (3) chemical, biological or nuclear weapon production and development and (4) steps taken to undermine U.S. and international efforts toward stabilization and reconstruction of Iraq.  It also blocks the property of those who are controlled by or directly or indirectly acting for any individual whose property or property interests have been blocked.  Once the property or property interest is blocked, it may not be transferred, paid, exported, withdrawn or otherwise dealt in.

Blocking of property and interests in property includes, but is not limited to, the prohibition of (1) contributing any funds, goods or services to or for the benefit of any person whose property has been blocked pursuant to these sections, (2) receiving funds, goods or services from such person and (3) dealing in any security that is in the control of a U.S. person but inscribed or held for the benefit of any such persons, unless otherwise authorized by these sections or by special license.  Any transfer that violates this part will be deemed null and void unless the transfer was made before the part’s effective date and the person who holds or maintains the property had written notice of or by written evidence had recognized the transfer.

These prohibitions on transactions involving blocked property apply to transactions by any U.S. person in a location outside the U.S. with respect to property that the U.S. person knows, or has reason to know, is held in the name of a person whose interests in the property are blocked. 

The prohibition on dealing in blocked property also prohibits U.S. financial institutions from performing under any existing credit agreements, including, but not limited to, charge cards, debits cards, or other credit facilities issued by a U.S. financial institution to a person whose property or property interest are blocked.  Likewise, a setoff against blocked property, whether by a U.S. bank or person, is a prohibited transfer. 

President Bush Imposes Sanctions Against the Cote d’Ivoire

On February 7, 2006, the President imposed sanctions against the Cote d’Ivoire in response to the United Nations Security Council’s determination that the situation in Cote d’Ivoire poses a threat to international peace and security in the region.  These sanctions prohibit U.S. persons, wherever located, or anyone in the United States from engaging in any transaction with any person or entity found to:

  • constitute a threat to the peace and reconciliation process in Cote d’Ivoire,
  • be in serious violation of International law in Cote d’Ivoire,
  • have directly or indirectly supplied, sold or transferred to Cote d’Ivoire arms or assistance, advice or training related to military activities,
  • to have publicly incited violence and hatred contributing to conflict or
  • to have provided material, financial or technical assistance to those qualified above or to any persons designated pursuant to this order.

Any property or interest in property of these persons that is in the United States or comes into the possession of a U.S. person, including an overseas branch, must be blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.

In addition, the following persons fitting the above description were added to the OFAC Specially Designated Nationals list: Eugene Ngoran Kouadio DJUE (Leader of Union for the Total Liberation of Cote d’Ivoire, born December 20, 1969); Martin Kouakou FOFIE ("New Forces" Zone Commander in Korhogo, born January 1, 1968) and Charles BLE GOUDE (Head of "Young Patriots," born January 1, 1972).

The Federal Register Publishes OFAC’s New Economic Sanctions Enforcement Procedures for Banking Institutions

Because of their unique role in the implementation of OFAC sanctions programs and the nature of banking institutions’ transactions, OFAC is publishing enforcement procedures for banking institutions effective February 6, 2006.  Banking institutions under this rule are depository institutions supervised or regulated by the Board of Governors, the Federal Reserve System, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency or the Office of Thrift Supervision.

Pursuant to these new rules, OFAC will be reviewing banking institutions with economic sanction violations or suspected violations on a periodic basis.  As part of its investigation, OFAC will require the subjected institutions to identify what actions led to the violation and what actions the institution has taken to overcome the deficiencies in its system that enabled these actions.  Such an investigation may lead to one or more of the following: an administrative subpoena, an order to cease and desist, a blocking order, an evaluative letter summarizing concerns, a civil penalty proceeding or the suspension and possible revocation of an OFAC license.

When making its decision as to administrative action OFAC will consider, among others, the following factors:

  • the institution’s history of sanctions violations,
  • the size of the institution and the ratio of OFAC-related transactions handled correctly to OFAC-related transactions handled incorrectly,
  • the quality and effectiveness of the institution’s overall OFAC compliance program,
  • if violations are the result of systemic failures or are atypical and
  • actions taken by the institution to correct the problems that led to the apparent violation or violations.

In conjunction with this interim final rule, OFAC published a notice of partial withdrawal of the 2003 proposed Economic Sanctions Enforcement Guidelines.  The proposed rule (68 FR 4422-4429, January 29, 2003) is withdrawn with respect to "banking institutions" as defined in the interim final rule.

OFAC will be taking comments on the new procedures any time before March 13, 2006.

ABN AMRO Bank Assessed Civil Money Penalties for Unsafe and Unsound Practices

On December 19, 2005, the Board of Governors, OFAC, the State of Illinois Department of Financial and Professional Regulations ("IDFPR") and the New York State Banking Department ("NYSBD") assessed civil money penalties for unsafe and unsound practices against ABN AMRO Bank.

One of ABN AMRO’s overseas branches developed special procedures concerning funds transfers, check clearing and letter of credit transactions that circumvented the branch’s U.S. law compliance systems.  These special procedures allowed the overseas branch to engage in transactions related to Iran, dealings in services of Iranian origin, the facilitation of exportation of services to Iran, and transactions in which the Government of Libya had an interest.

ABN AMRO failed to adequately review these special procedures to determine if they were consistent with U.S. law.  ABN AMRO also failed to adequately document, report, and follow up on negative findings from certain internal audits; failed to produce negative internal audit findings in a timely manner to U.S. supervisors; failed to follow up on inquiries referred to the New York branch from overseas offices regarding compliance with U.S. law; overstated the extent of its due diligence efforts and failed to escalate the special procedures for review outside of the trade processing business or reporting line.  In short, ABN AMRO lacked effective systems of governance, audit and internal control to oversee the activities of its branches with respect to legal, compliance and reputational risk; justifying the imposition of strong penalties on the U.S. parent.

The Board of Governor’s assessed a $40 million penalty against ABN AMRO, and FinCEN assessed a $30 million penalty, which will be satisfied with a single payment of $40 million by ABN AMRO. In addition, ABN AMRO will pay the NYSBD $20 million and the IDFPR $15 million.  ABN AMRO will also make a voluntary endowment to the Illinois Bank Examiners’ Education Foundation in the amount of $5 million.

OFAC further ordered that a qualified independent third party review ABN AMRO’s transactions

  • in its Chennai, India operations from January 1, 2003, to August 31, 2004, to determine whether any of its transactions subject to the ITR or the LSR were processed through, or on behalf of any U.S. individual or entity.
  • in its Dubai, U.A.E. branch and its Chennai, India operation from August 1, 2002, through August 31, 2004, to determine whether any transactions subject to any OFAC regulation, other than the ITR and LSR regulations, were processed through, or on behalf of, any U.S. individual or entity.
  • in its Dubai, U.A.E. branch and Chennai, India operations, on an annual basis for a three year period beginning September 1, 2004, to determine whether any transaction subject to OFAC regulation was processed through, or on behalf of, any U.S. individual or entity.

These recent cases suggest that OFAC has become increasingly active in monitoring export compliance and that sanctions can be severe.  Gibson, Dunn & Crutcher LLP helps many of its clients develop and maintain their export compliance programs.  If you have questions or concerns about the effectiveness of your compliance procedures, the lawyers in our International Trade practice are available to assist you.

For further information, please contact
Judith A. Lee (202- 887-3591) or Scott Dodson (202-887-3772) in Gibson, Dunn & Crutcher’s Washington, D.C. office or Paytre R. Topp (213-229-7966) in the firm’s Los Angeles office.

©2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.