OFAC's September 17, 2019 settlement with UK-based British Arab Commercial Bank (BACB) demonstrates how challenging and complex it can be to assess whether offshore transactions in US dollars (USD) that involve US sanctions targets are in all respects outside of OFAC's enforcement jurisdiction. This case indicates that OFAC expects non-US institutions like BACB to look comprehensively at their USD funding arrangements, including investigating whether other non-US banking partners are themselves transacting with the US financial system, prior to concluding that OFAC's jurisdiction does not apply. When transacting in USD with US-sanctioned countries (or sanctioned parties), even if those transactions themselves do not touch the US financial system, this case shows that banks may be at risk if they limit their diligence into the provenance of such offshore USD pools and fail to confirm that the funds did not pass through the United States. This is a complex and novel case, but one worthy of careful analysis by non-US banks engaged in potentially higher risk transactions in USD that rely on a determination that the arrangements are outside of OFAC’s jurisdiction.
BACB was accused of violating OFAC's Sudanese Sanctions Regulations (SSR) between 2010 and 2014 by processing 72 bulk funding payments in USD totaling $190,700,000 on behalf of several Sudanese financial institutions. (The SSR are no longer in effect, but were in effect during this period.) This case raises interesting points regarding how OFAC established its jurisdictional authority to take action against BACB by finding that one or more "US persons" were involved.
By way of background, senior Treasury Department (Treasury) officials have stated on the record that OFAC's jurisdiction does not extend to the use of the USD itself. (See, for example the May 25, 2016 testimony given by Adam Szubin before the House Committee on Foreign Affairs when he was Acting Under Secretary at Treasury's Office of Terrorism and Financial Intelligence.) Nevertheless, the BACB case illustrates the high standard to which OFAC will hold non-US financial institutions when it comes to determining whether and how their offshore USD banking arrangements may touch the US financial system, even when such US jurisdictional links are not apparent and may require inquiries with other banking partners to gain a full understanding of the provenance and movement of funds. The reality, however, is that all USD originate in the United States, and, unfortunately, the case against BACB does not express any clear limitation on OFAC's view of its authority to establish jurisdiction over offshore USD transactions, even when the link to the US financial system may not be apparent and may require affirmative inquiries and careful analysis.
The basis on which OFAC established jurisdiction in this case is more attenuated than we have seen in most of its prior settlements involving banks. As a starting point, OFAC noted that BACB had "no offices, business or presence under US jurisdiction," and that BACB processed the transactions in question via internal book transfers involving a nostro account at another non-US bank. OFAC conceded that "these transactions were not processed to, or through the US financial system." Even the bulk funding of BACB's USD nostro account for most of the period in question came from "non-US financial institutions in Europe" according to OFAC.
Case closed, right? The reality is that non-US banks should not get too comfortable that they are operating wholly outside US jurisdiction until they have looked at all relevant aspects of an offshore banking arrangement in USD that could present US sanctions risk.
To be clear, there were US financial institutions that processed the payment transactions used to fund BACB's offshore nostro account, which formed the basis for OFAC's determination that it had the authority to bring this case. Initially, the link to US banks was clearer – until 2007, "BACB sourced the USD inflows from its accounts at Bank C and Bank D - both US financial institutions located in New York." But then things got more complicated, and BACB began funding its offshore nostro account at "Bank B" from "BACB's account(s) at a non-US financial institution, Bank E, and in 2014 BACB utilized a separate non-U.S. financial institution, Bank F, to fund the Bank B nostro account. Funds transfers moving BACB's funds from its account at Bank E to its account at Bank B were processed by Bank E's USD correspondent, Bank G, and Bank B's USD correspondent, Bank B's New York Branch, both of which are located in New York."
OFAC does state that it was "Bank E and Bank F [that] routed [these USD bulk funding transactions] through multiple US financial institutions," not BACB. But OFAC still saw fit to charge BACB, a non-US bank with no presence in the United States, conducting transactions with Sudan that did not clear through the United States, using an account at another non-US bank that it funded through yet two more non-US banks. But where OFAC found its jurisdictional hook was that those two non-US banks that BACB used to fund the account – which were several layers removed from the transactions with Sudan – themselves transacted with US-based banks or US branches of non-US banks while processing the funds transfers to BACB's non-US bank (Bank B) responsible for processing the Sudan-related transactions.
It is worth asking whether BACB was found to have had any awareness or even reason to know that its non-US banking partners were transacting through US correspondents. OFAC is not clear on this point. What OFAC does say is that "several BACB employees, including certain managers and a member of the compliance team, were aware of this funding arrangement. They believed, however, all Sudanese transactions, including the inflow of USD to its nostro account at the non-US financial institution would be processed outside the United States via funding from the BACB accounts in Europe, and understood how it would attempt to circumvent the US sanctions regulations." Here OFAC seems to be saying that the relevant BACB personnel had a good faith belief that their activity was only being conducted on the books of a non-US bank and funded by non-US banks. How OFAC then drew the conclusion that these bank staff "understood how it would attempt to circumvent the US sanctions regulations" is unclear – there are references to emails of BACB staff that OFAC seemed to rely on for this conclusion, but OFAC did not include any details of those materials in the settlement documents.
While perhaps a bit of an oversimplification, the prevailing view in the US sanctions bar is that one does not unlawfully "circumvent" US sanctions regulations by engaging in activity in the ordinary course of business that one reasonably believes to have no jurisdictional link to the United States. The statements from OFAC in this case do raise a question about why it believes BACB's intent was to "circumvent" US sanctions. In fact, OFAC states that "BACB opened the USD nostro account because it believed that the transactions would not implicate US jurisdiction. At the time of opening the account BACB received assurances from Bank B that it had 'an internal USD clearing system and [could] settle USD in [the country of Bank B] without going through New York [i.e., the United States].'" That statement makes it sound like these bank staff relied on a representation from their banking partner that the activity would not touch US jurisdiction. OFAC seems to take the position that they should have looked deeper into the activity of their unaffiliated banking partners in order to confirm whether any US jurisdictional links were present. Yet, it is still not clear how deep OFAC expects small, non-US banks like BACB to dig.
OFAC goes on to say that "BACB appears to have ignored warning signs that reasonably should have put the bank on notice that its conduct constituted a violation of US law (for example, the bank’s knowledge of US authorities' sanctions-related enforcement actions involving other European banks engaging in similar conduct)." With this, OFAC seems to be saying that its past enforcement actions against other non-US banks, where the facts were quite different from these and the US jurisdictional links generally clearer, should have provided notice to BACB of the fact that non-US banks several layers removed from its transactions with Sudan were clearing USD transactions through the United States.
The legal authority on which OFAC relied in this case is also noteworthy. The agency said that "BACB violated the SSR by exporting services to Sudan when it processed 72 bulk funding transactions totaling $190,700,000 to support US dollar transactions for Sudanese clients…BACB appears to have violated section 538.205 of the SSR when it directly or indirectly exported financial services from the United States to Sudan by bulk funding its Bank B nostro account through the United States." OFAC's position appears to be that BACB exported financial services "from the United States to Sudan," even though BACB was in the United Kingdom, used an account at a third country bank, and transacted on the books of that non-US bank without clearing those payments through the US. In some instances BACB even funded that third country account through other third country banks. But OFAC seems to be taking the position that BACB exported services from the United States due to the involvement by US banks in processing payments for the non-US banks that were used to fund the nostro account.
One important way in which the BACB case differs from most other OFAC settlements with non-US banks (e.g., the so-called "wire-stripping" cases) is that BACB is not accused of concealing from any US banks the links to Sudan. OFAC did not charge BACB with "causing" any US banks to violate its regulations. There is an interesting contrast between OFAC's choice to charge BACB with an indirect exportation of financial services to Sudan and its statements that this prohibition only applies to US financial institutions: OFAC states that the process of funding BACB's USD nostro account "did involve transactions processed to or through US financial institutions in apparent violation of US economic sanctions administered and enforced by OFAC which prohibited US persons, including US financial institutions, from processing such transactions." BACB, of course, is not a US financial institution, and no US financial institutions have yet been penalized in this matter. OFAC stated that "BACB and Bank B ensured that the USD transactions with its Sudanese clients occurred outside of the United States and without knowledge of BACB's or Bank B's USD correspondents." Yet, OFAC does not specify any deceptive conduct on the part of BACB or Bank B, which had been a prominent feature of its analysis of other major cases against non-US banks.
Finally, this case shows that in arriving at a settlement amount, OFAC can consider a party's ability to pay – at least in some cases. The transactions in the BACB case totaled $190,700,000, and OFAC found the case to be "egregious," so the base penalty amount was $381,400,000. However, OFAC stated as follows: "In consultation with BACB's domestic regulator, the United Kingdom's Prudential Regulation Authority, OFAC determined that the Bank's operating capacity was such that it would face disproportionate impact if required to pay the proposed penalty of $228,840,000. As a result, and in view of BACB's operating capacity, the fact that it has represented that it ceased the conduct described below [and other remedial steps]…BACB will remit $4,000,000 to settle these potential violations." This amounts to a 98% reduction off the proposed penalty amount, which is notable in light of the fact that BACB's 2019 financial factsheet says the bank is "currently tracking ahead of target" financially and seeing "ongoing strong performance across the business." BACB reported profit of nearly $16 million for the first half of 2019, so the $4 million settlement amounted to about six weeks of the bank's profits.
Non-US banks, particularly smaller institutions that may believe they are operating outside OFAC's jurisdiction when conducting offshore USD transactions, should carefully analyze this case in assessing their level of regulatory risk.