Office of Foreign Asset Control (OFAC) New Jersey Bankers Association Compliance University June 23, Asaad A.

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1 Office of Foreign Asset Control (OFAC) New Jersey Bankers Association Compliance University June 23, 2016 Asaad A. Faquir Director Reliability - Service - Knowledge

2 What is OFAC The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. OFAC acts under Presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

3 OFAC is the 800lb Gorilla

4 OFAC Powers OFAC has the incredible power to declare monetary transactions to, through, from, or otherwise under the jurisdiction of the US to be blocked, limited, or otherwise stymied

5 THE LIST Specially Designated Nationals and Blocked Persons Lists (SDN List) Publicly known list SDN is currently 982 PDF pages (6 fewer than in Dec 2015) Includes people, businesses, boats, etc. Includes aliases and other identifying information

6 Non-SDN List In addition the SDN List there are non-sdn lists maintained by OFAC NS-PLC List (Palestinian Legislative Council) Part 561 List (Financial institutions related to Iran) NS-ISA List (Iranian sanctions) FSE List (Foreign Sanctions Evaders) SSI List (Sectoral Sanctions Identification- Russian) List (Executive Order Iran)

7 OFAC Sanctions List(s) Balkans related sanctions- Undermining international stabilization The Balkan Peninsula and the Balkans are a peninsula and a cultural area in Southeast Europe with different and disputed borders (former Yugoslavia, Bosnia, Serbia) Belarus sanctions- Undermining democratic processes in Belarus North of Ukraine, South of Lithuania, between Poland and Russia

8 OFAC Sanctions List(s) Cyber security Executive Order No one is on the list yet Counter narcotics (Kingpin Act) El Chapo Counter terrorism Magnitsky Sanctions Sergei Leonidovich Magnitsky was a Russian accountant and auditor whose arrest and subsequent murder in custody generated international media attention Transnational Criminal Organization Sanctions

9 OFAC Sanctions List(s) Cuba Iran Libya Yemen Central African Republic Ukraine-Russia Related Sanctions North Korea Many, many others

10 How to Comply With OFAC Start with a Risk Assessment OFAC risk is in direct relation to the Bank s international customers and transactional reach Similarities to BSA/AML Risk Appendix M

11 OFAC Risk and Risk Assessments Appendix M identifies the following risk factors: Customer Base Geography of the Bank Products and services of the Bank OFAC history of the institution Bank management and oversight (including training) Compliance culture and management

12 Community Banks and OFAC Risk Most community banks have low OFAC risk Locations of customers Domestic customers Few, if any, correspondent accounts Limited transactions where OFAC risk would be considered high International wires Remittances Compliance culture is generally strong

13 OFAC Risk Community banks are not immune to risk Customers change New suppliers New interests All transactions pose some level of risk for OFAC Cross-border ACH Electronic banking services Belief by OFAC list entities (the listed?) that community banks may not be up to the compliance task

14 OFAC Compliance Responsibility Compliance with OFAC is an implied requirement of every SINGLE financial transaction conducted by U.S. persons since non-compliance is a violation of U.S. law U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all U.S. incorporated entities and their foreign branches. In the cases of certain programs, foreign subsidiaries owned or controlled by U.S. companies also must comply. Certain programs also require foreign persons in possession of U.S.-origin goods to comply.

15 OFAC Compliance Penalties The fines for violations can be substantial. Depending on the program, criminal penalties for willful violations can include fines ranging up to $20 million and imprisonment of up to 30 years. Civil penalties for violations of the Trading With the Enemy Act can range up to $65,000 for each violation. Civil penalties for violations of the International Emergency Economic Powers Act can range up to $250,000 or twice the amount of the underlying transaction for each violation. Civil penalties for violations of the Foreign Narcotics Kingpin Designation Act can range up to $1,075,000 for each violation.

16 History of OFAC Penalties Year # of Settlements Total $ of Settlements $200,735, $91,650, $1,139,158, $137,075, $1,209,298, $599,705, $3,545,246 Totals 133 $3,381,170,388

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18 OFAC Compliance OFAC at account opening: Interdiction scans, credit reports, check systems, etc. Ongoing and routine customer database scrubs: Nightly, weekly, monthly, as OFAC updated OFAC on Transactions: Wires, ACHs, Remittances, Cashiers Checks, etc.

19 Transaction Scans International transactions Wires ACH (IATs) Remittances Make sure intermediary banks are scanning Monetary instruments Cashiers checks/bank checks Money orders Any transaction the Bank wants to scan for OFAC purposes

20 Transaction Scans Who or what should be scanned Beneficiaries, senders, beneficiary banks, intermediary banks, payees, payers, vessels, intermediary companies Essentially everyone and everything can be scanned for OFAC purposes Banks typically take a risk based approach Common exclusions Bank customers US Banks Transactions below a certain threshold

21 OFAC Scan Results 3 types of results Negative Positive False positive Nearly all scans come back negative or false positive False positive is a match or hit based on the sensitivity of the scanning software and the names being scanned Bank should have a process for reviewing hits to ensure they are false positives What list was the hit from? Why did the system hit? Why do we not think the hit is really a positive OFAC match? Banks can use the good guy/exception list in most interdiction software to reduce false positives

22 True Matches Transactions can be blocked, limited, or rejected Blocked transactions are like freezes on funds, the money still belongs to the person they just can t touch it Limited transactions are allowable in a small defined circumstance according to the reason for being on the SDN list Rejected transactions are just what they sound like

23 True Matches OFAC only wants you to block or reject funds when the match is really a match Unless you have an exact match or are otherwise privy to information indicating that the hit is a sanctions target, it is recommended that you do not actually block a transaction without discussing the matter with OFAC. OFAC provides a detailed due diligence process for assessing a match

24 Block and Rejecting Blocked funds need to be moved into a separate or otherwise segregated interest bearing account Bank can and should pay a commercially reasonable amount of interest Bank can charge a service fee on these accounts with a few minor exceptions based on the official sanction rule Call OFAC before escheating any blocked funds You CAN tell the customer that their funds are blocked in accordance with OFAC They can apply for and may receive the ability to unblock the funds If the Bank is not party to a transaction (i.e., no money will be at the Bank to block ), but is asked to process funds that would otherwise be blocked or violate OFAC, it must reject the transaction

25 Reporting Blocked and Rejected Within 10 days of blocking or rejecting a transaction, the Bank must make a report to OFAC Most banks will likely have called OFAC directly before ever blocking or rejecting funds, but nevertheless the filing of a report is required

26 50 percent rule Blocking assets when individuals are sanctioned but the entities they may own are not is tricky OFAC looks for 50% ownership If the blocked individual only owns 49.99%, the funds should not be blocked OFAC will allow you to add up the ownership of blocked individuals El Chapo owns 30% and A. Rahman owns 25% of an ice cream shop the ice cream shop funds would be blocked

27 OFAC Penalties The fines for violations can be substantial. Depending on the program, criminal penalties for willful violations can include fines ranging up to $20 million and imprisonment of up to 30 years. Civil penalties for violations of the Trading With the Enemy Act can range up to $65,000 for each violation. Civil penalties for violations of the International Emergency Economic Powers Act can range up to $250,000 or twice the amount of the underlying transaction for each violation. Civil penalties for violations of the Foreign Narcotics Kingpin Designation Act can range up to $1,075,000 for each violation.

28 OFAC Penalty Between February 3, 2011 and March 10, 2011, M&I Bank originated six funds transfers totaling $67,357 on behalf of its customer, a company specializing in carpets that included the word Persian in its name (the Company ), for the purpose of paying an outstanding balance owed to an Iranian entity located in Iran for the purchase of Iranian-origin carpets. The Company had been a customer of M&I Bank since 2009, at which time the importation of Iranian-origin carpets from Iran or a third country to the United States was authorized under a general license (formerly of the ITSR). M&I Bank stated that it added the Company to the bank s False Hit List on May 29, 2009, after its OFAC interdiction software generated multiple alerts due to the word Persian in the Company s name. OFAC revoked the general license for the importation of Iranian-origin carpets in of the ITSR effective September 29, 2010; however, M&I Bank did not remove the Company from the False Hit List or implement any additional measures to prevent or identify possible violations involving the Company.

29 OFAC Penalties Barracuda Networks - $38,930 11/24/15 Selling or allowing others to sell products to Iran and Sudan ($123,000 in invoices) Banco do Brasil (NY Branch) - $139,500 11/4/15 Added the name Isfahan to their system s good guy/exception list Isfahan is the name of an Iranian city

30 OFAC Penalties- Close to Home Gil Tours Travel, Inc. (Gil Travel), of Philadelphia, Pennsylvania, has agreed to pay $43,875 to settle potential civil liability for apparent violations of the Cuban Assets Control Regulations, 31 C.F.R. part 515 (CACR). Between October 21, 2009 and August 19, 2010, Gil Tours appears to have violated of the CACR when it dealt in property in which Cuba or Cuban nationals had an interest, by providing Cuba travel-related services involving 191 individuals, without authorization from OFAC. OFAC determined that Gil Travel did not voluntarily self-disclose the apparent violations and that the apparent violations occurred prior to agency notice. Under the Cuba Penalty Schedule, 68 Fed. Reg (Jan. 29, 2003), the base penalty amount is $97,500. OFAC reported that the settlement amount was arrived at after considering that Gil Travel had some awareness that it was providing Cuba-related travel services, and that its conduct could be in violation of the CACR; had no sanctions compliance plan at the time of the apparent violations; has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the first transaction giving rise to the apparent violations; and substantially cooperated with OFAC during its investigation of the apparent violations, including by entering into a statute of limitations tolling agreement for a total of 446 days.

31 Mistakes Were Made

32 OFAC Oops Common OFAC mistakes Not everyone is scanning when they should be According to Bank policy Based on risk Not everyone is scanning what they should be Every department should not be doing it differently Wires, Deposits, Lending, E-banking Every employee within a department should not be doing it differently Assuming 3 rd parties are scanning on your behalf And to your standards

33 OFAC Oops Common mistakes using interdiction software Too low sensitivity System not routinely updated by software provider Names scanned are altered by employees Asaad A Faquir (on transaction) Asaad Faquir (scanned name) Systems should still flag this, but less sophisticated ones may not Glued or Gluey names (spaces are important) AsaadAFaquir Misspelled names Assad Faqir Different systems used by different departments without knowledge of the system settings or capabilities

34 OFAC Oops Not managing the good guy list appropriately Should have a process for putting people on the good guy list Not everyone who routinely generates a match can or should be a good guy Must periodically OFAC scan the good guy list Generally when the list updates But be aware of OFAC licenses changes

35 Iran Sanction Changes Removed several entities from the SDN List Mostly allows US Banks to deal with other FIs that deal with Iran Further, even after Implementation Day, the prohibitions set forth in the ITSR remain in place, including the prohibition in section of the ITSR on the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of any goods, technology, or services to Iran or the Government of Iran, with the exception of transactions that are exempt from regulation or authorized by OFAC (see FAQ M.9). Consequently, the clearing of U.S. dollar- or other currency-denominated transactions through the U.S. financial system or involving a U.S. person remain prohibited, unless the transactions are exempt from regulation or authorized by OFAC.

36 Cuban Sanction Changes Cuban Remittances Most are unblocked up to the limits allowed Some previously blocked funds can/should be released if they would not have been blocked under the new rules Some exceptions apply Banks are allowed to process remittances under the rules, subject to record keeping and reporting requirements

37 Cuban Sanction Changes US Dollars can be used to conduct transactions in Cuba or with Cuban nationals pursuant to CACR (e.g., telecommunication payments) Authorized US persons travelling to Cuba can establish bank accounts there US debit cards and credit cards are allowed to be used in Cuba For authorized US travelers For non-us travelers with US Bank accounts

38 Cuban Sanction Changes Cuban nationals lawfully present in the US can have US bank accounts Should be limited to when they are in the US, but some exceptions are allowed Cuban nationals in counties other than the US or Cuba can have US bank accounts For those purposes and transactions authorized under CACR

39 Cuban Sanction Changes U-Turn transactions are allowed when Cuba or a Cuban National is involved as long as Money transfers must originate and terminate outside the US Originator and beneficiary may not be subject to US jurisdiction

40 Summary The OFAC rules rule everything done with US dollars and through the US financial system For most banks OFAC is low risk but not no risk Effective OFAC compliance is multilayered Learn from the mistakes of others, the path is well marked with big penalties to prevent similar mistakes being made by your bank Iran sanctions, still mostly in effect Cuban sanctions, somewhere between full on and full off

41 Questions Asaad Faquir, Director RSK Compliance Solutions, LLC 2001 Route 46 Waterview Plaza, Suite 310 Parsippany, NJ