International Law Advisory - OFAC Amends Enforcement Procedures for Banking Institutions and Requests Comments Regarding Enforcement Policies for Other Industries

The United States Department of the Treasury, Office of Foreign Assets Control (“OFAC”) published in today’s Federal Register an interim final rule regarding a change to enforcement procedures for banking institutions.  See 71 Fed. Reg. 1971.  The rule will take effect for enforcement cases commenced on February 13, 2006 or thereafter, and supercedes a rule proposed by OFAC on January 29, 2003.  OFAC has requested that public comments on the rule be received by March 13, 2006.  In addition, OFAC has requested public comments regarding enforcement procedures for both financial and non-financial sector industries, including import-export businesses, the computer and software industries, and e-commerce. 

Banking Institutions:
The interim final rule affects “banking institutions,” defined for purposes of this rule to include “depository institutions regulated by one of the regulators that belongs to the Federal Financial Institutions Examination Council (“FFIEC”).”   OFAC has stated that the rule is intended to take into account the varying situations of each banking institution in determining appropriate penalties.  OFAC intends to exchange with federal banking regulators information related to apparent violations.

The primary changes relating to enforcement actions against banking institutions instituted by this interim final rule are as follows:

• Except in the case of egregious violations, OFAC will evaluate apparent violations over a period of time, rather than evaluating each violation separately;
  
• OFAC will periodically evaluate apparent violations in light of the institution’s overall compliance program and record; this evaluation will include:
  
  • the institution’s compliance history
  • the circumstances surrounding the violation
  • any patterns or weaknesses in the institution’s compliance program
  • whether there is evidence of negligence or a fundamental flaw in the compliance program;
  • whether the institution filed a voluntary disclosure (provision of information to OFAC is not considered to be a “voluntary disclosure” when another party is required to file a report concerning the same transaction; however, such reports will nonetheless be considered a mitigating factor, though will be accorded less weight than a voluntary disclosure);
  • the number of transactions or accounts handled properly as compared with the number of those for which a violation has occurred;
  • the institution’s cooperation with OFAC administrative subpoenas;
  • remedial actions taken by the institution
    
• After conducting a periodic review, OFAC will discuss the results of the review with the institution, and will inform the banking institution of its preliminary assessment of an appropriate enforcement action.  Once OFAC has reached a decision as to the appropriate enforcement action, it will notify the institution, as well as the institution’s primary federal banking regulator, in writing;
  
• If OFAC has indicated an intention to pursue civil penalties, OFAC’s existing civil penalty procedures will be followed, including the opportunity for the institution to seek an informal settlement prior to the issuance of a prepenalty notice.

Other Financial and Non-financial Institutions:
This interim final rule applies only to banking institutions.  OFAC also indicated in its Federal Register notice that it is considering separate enforcement procedures for other entities in both the financial and non-financial sectors, and has requested public comments regarding whether similar enforcement procedures would be appropriate.  Specifically, OFAC has requested comments from parties interested in procedures related to the following types of institutions and businesses:

• Broker-dealers, mutual funds, investment advisers, hedge fund advisers, future commission merchants, commodity trading advisers, commodity pool operators, and other entities regulated by the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”);
  
• Credit unions and banks not insured by U.S. Government agencies, certain money service businesses, and other financial sector entities regulated by state (rather than federal) financial regulators;
• Insurance companies, pension funds, finance companies, mortgage bankers, and government-sponsored, financial sector entities;
  
• Complex corporate structures, including entities regulated by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the SEC, and the CFTC;
  
• Non-financial sectors, such as import-export businesses, the computer and software industries, and e-commerce.

We will continue to keep you apprised of developments related to export controls and sanctions issues.  If you have any questions or for further information, please feel free to contact Ed Krauland at 202.429.8083, or Meredith Rathbone at 202.429.6437.