OFAC Asserts Jurisdiction over French Bank’s Internal Transfers and Foreign Exchange Transactions

OFAC’s January 4, 2021 civil settlement with France-based Union de Banques Arabes et Françaises (“UBAF”) provides another case study of the agency’s expansive view of its jurisdiction over transactions occurring outside the United States, when the US financial system is involved even indirectly.  This case is particularly noteworthy coming after OFAC’s recent settlement with British Arab Commercial Bank, which we previously analyzed.  A key lesson from the UBAF settlement is that OFAC’s jurisdiction may extend to transactions conducted outside the United States – including internal transfers on the books of a non-US bank – that are “closely correlated” with subsequent transactions involving the US financial system.  In light of this case, non-US persons operating outside the United States should consider reviewing their OFAC risk if their activity may rely on the US financial system even indirectly. This case focused on UBAF’s trade finance business, and specifically its business with Syrian financial institutions.  Between August 2011 and April 2013, OFAC determined that UBAF operated accounts in USD and other currencies for US-sanctioned Syrian financial institutions, “and indirectly conducted USD business on behalf of these institutions through the US financial system.”  The key word is “indirectly.”   Below is a brief discussion of each of the types of transactions that OFAC focused on in this settlement and how OFAC asserted jurisdiction over these transactions that relied on the US financial system “indirectly.”

• Most of the transactions underlying the settlement with UBAF were internal transfers on the bank’s books, which were not themselves routed through the United States. However, OFAC found these internal transfers among non-US parties outside the United States to be correlated with other transfers that were processed through US banks.  Some of these transactions involved internal transfers between two UBAF clients, one sanctioned and one not.  OFAC found that, following these internal transfers between clients, “UBAF then processed one or more USD transfers on behalf of the non-sanctioned client that cleared through a US bank and whose transaction dates and amounts correlated closely to the related internal transfers reflected on UBAF’s books.”   So for these transactions, OFAC asserted jurisdiction based on the finding that a transfer on behalf of a non-sanctioned client relied on US clearing or settlement, apparently because it was preceded by (and its particulars “correlated closely” with) a transaction with a sanctioned client.  It would be helpful if OFAC could clarify whether there was any more specific link between the internal transfer on behalf of the sanctioned client and the transaction through the United States on behalf of the non-sanctioned client.  It is noteworthy that only the transaction on behalf of the non-sanctioned client passed through the United States.
• Another group of internal transactions that OFAC penalized were FX transactions with a sanctioned Syrian customer that were conducted on UBAF’s books – again there would have presumably been no direct US jurisdictional link when UBAF was merely transacting on its own books. OFAC found that UBAF debited an account in one currency and credited the same sanctioned customer’s account in another currency, and “then conducted a US-cleared FX transaction with a non-sanctioned third party that correlated closely with the original FX transaction involving the sanctioned customer.”  Again OFAC’s description is short on details.  One is left with important unanswered questions, such as whether the “US-cleared FX transaction” was undertaken by UBAF or by its third party partner and whether there was any more specific link between that US-cleared transaction and the FX exchange for the bank’s customer.  In any case, this underscores the point that many FX transactions are in fact cleared through the United States, again debunking the commonly held misconception that non-USD transactions are necessarily outside US jurisdiction.
• A third group of violations involved trade finance transactions. Some of these seem fairly clearly to implicate US jurisdiction, where UBAF either issued a USD-denominated letter of credit on behalf of a sanctioned party or confirmed a USD-denominated letter of credit issued by a sanctioned bank and paid on the letter of credit through a US-cleared transaction.  But the jurisdictional basis is less clear for the back-to-back letter of credit transactions that were also part of the settlement.  For these, OFAC said that a sanctioned Syrian entity was the beneficiary of export letters of credit or the applicant for import letters of credit “that did not involve USD clearing, but the intermediary entered into or received one or more corresponding USD letters of credit to purchase or sell the same goods.”  So, while UBAF’s immediate obligations in these transactions on behalf of its clients did not appear to touch US jurisdiction, those of the intermediary in these back-to-back transactions did.  (OFAC does not specify the role of the intermediary here, e.g., a broker or some other party involved in these sales.)  There are a variety of possible reasons why the Syrian party (UBAF’s client) did not require payments to clear through the United States while the intermediary did.  But the lesson that OFAC seems to be trying to convey is that non-US financial institutions should consider if the counterparties of their clients (or the counterparties’ banks) may be engaging in transactions through the United States.  Due diligence and effective legal analysis are key, along with other compliance controls such as appropriate contractual language.

Another consideration in looking at this settlement is what specific provisions of OFAC’s regulations would be violated by this type of conduct.  Most of OFAC’s non-US bank cases involve allegations that the bank “exported” financial services from the United States to the sanctioned country/party by engaging in direct transactions with or through US-based banks (whether their own US branches, third party clearing banks, etc.).  While that theory of liability has been questioned, it would seem even more challenging for OFAC to claim that UBAF’s transactions, some of which had no direct links to the United States at all, constituted an “exportation” of services from the United States by UBAF to or for the benefit of a sanctioned country/party.  OFAC may have been able to sidestep that thorny issue to some degree in this case, given that UBAF is only accused of dealing in the “blocked” property of the Syrian government and other Specially Designated Nationals (“SDNs”) and “blocked” persons, as those “blocking” prohibitions are very broad.  It is worth questioning though whether OFAC could have brought this case effectively if it had only involved non-“blocked” parties in Syria or another US-sanctioned territory, where only the prohibitions on “exportation” and other specified activities would have applied, rather than the broader “blocking” provisions.  Notably as well, UBAF is not accused of “causing” any violations by US parties, such as by removing references to US-sanctioned countries/parties or otherwise acting in a non-transparent or deceptive manner. OFAC stated that UBAF had a compliance program in place at the time and “demonstrated knowledge of OFAC sanctions laws, but it incorrectly believed that avoiding direct USD clearing on behalf of sanctioned parties was sufficient.”  OFAC has been actively pointing out instances in recent months when non-US persons have made incorrect determinations about their US sanctions risk.  (We’ve discussed a similar example relating to Venezuela.)  OFAC noted that most of UBAF’s violations occurred in late 2011, soon after the expansion of US sanctions against Syria.  This timing underscores that parties with OFAC risk exposure should conduct a prompt review following relevant changes in US law and policy, and should consider reaching out to experienced US counsel at an early stage to be confident that their analysis accurately and fully reflects their risk. As part of this settlement, OFAC stated that UBAF “exited its relationships with certain high-risk banks, exited business with Sudan and Syria in all currencies, and closed a foreign subsidiary for risk-related reasons.”  While this sort of “de-risking” may be warranted in some instances, the unfortunate result in many cases is to deprive certain regions of international banking services and other links to the globalized world, which is particularly important in the context of humanitarian engagement and other activity that is not prohibited by or inconsistent with US law.  Financial institutions and others should be proactive in assessing their OFAC risk so that it can be managed appropriately, and hopefully without the need to terminate business or cut off services to customers that could be conducted consistent with US law.  As this case shows, it is often not a simple task to conduct an effective OFAC analysis, and reliance on experienced US counsel may make the difference.