EMEA COMPLIANCE SUMMIT 2017 Sanctions Roundtable Discussion Recent Changes and developments in international sanctions Ben Wood EMEA Sanctions Head Citi 1 Academy for Financial Institution Professionals 4 5 April 2017
Sanctions Authorities U.S. Sanctions Programs at a Glance 2
Sanctions Authorities Sanctions Authorities The U.S. Department of the Treasury s Office of Foreign Assets Control ( OFAC ) is the primary government body in the U.S. that administers and enforces economic and trade sanctions. The European Union imposes sanctions via regulations, which implement the sanctions in each EU Member State without further legislation being required by the Member States. However, each Member State is responsible for the enforcement and administration of EU sanctions and for implementing the penalties for their breach. Competent authorities of United Nation member states may adopt and implement UN Security Council Resolutions in addition to sanctions programs operated by the government or competent authority of that location. The Office of Financial Sanctions Implementation (OFSI), which is a part of HM Treasury, enables financial sanctions to make the fullest possible contribution to the UK s foreign policy and national security goals. It also helps to maintain the integrity of, and confidence, in the UK financial services sector. 3
U.S. Person U.S. and EU Person Applicability of U.S. Sanctions Sanctions regulations use the term U.S. Person to refer to both individuals and entities that are subject to U.S. Sanctions requirements. 4 Individuals All U.S. Citizens or permanent resident aliens of the U.S. Anyone located in the U.S. (for the period of their stay) Entities All entities organized in the United States including their branches, wherever located. All Entities located in the U.S.
Increased OFAC Activity In September 2016, OFAC designated PacNet Group, an international payments processor and money services business based in Canada, as a Transnational Criminal Organization (TCO) for its alleged history of money laundering on behalf of mail fraud schemes. This represents a major departure from the other TCOs that have been designated by OFAC, all of which represent traditional mafias with violent criminal histories. OFAC s willingness to deem a mail fraud scheme a significant threat to US national security, foreign policy or the economy suggests that OFAC may be willing target almost any kind of criminal group going forward. In addition to the increased designation activity, over the past two years, there has been a significant increase in regulatory requests from OFAC. Other financial institutions report a sharp increase in the number of administrative subpoenas similar increases suggesting that this is a broader trend across the industry. Beyond the sharply increased volume, the scope of subpoenas has also expanded with OFAC requiring detailed descriptions of control and governance processes and planned remediation efforts along with the more traditional root-cause analysis of apparent violations. Potential Changes under New Administration Increased OFAC Activity Indications that this trend of increased OFAC activity will continue and possibly accelerate under the new Administration. Strengthened Sanctions Under the Trump administration, there is likely to be an intensification of the sanctions on Iran, Cuba, and North Korea. Expanded Use of Sanctions The recent trend toward using sanctions to address other transnational law enforcement issues is likely to continue. 5 Impact Significant Time Demands and Cross-functional Cooperation Responding to OFAC subpoenas which carry civil and potentially criminal liability for misstatement is a lengthy process involving coordination across entire organizations. Additional Resources Required The increased workload has required incremental resources and internal reallocation within Sanctions Compliance and likely will continue to do so.
Potential Changes under New Administration 6 Iran In January 2016, under the terms of the Iran nuclear deal, the EU and UN terminated the majority of their sanctions against Iran. In contrast, most primary US sanctions remained in place with limited authorizations relating to commercial aviation, certain importations from Iran and the activities of foreign subsidiaries. This bifurcation of Iran sanctions is similar to the situation that existed from the 1990s to mid-2000s when the US was the only country with robust sanctions against Iran. Since signing the nuclear deal, the US State Department has devoted considerable resources to encouraging non-us banks to do business in Iran and to easing the way for US corporations and financial institutions to conduct authorized activity with Iran. Repeal of JCPOA During the campaign and since his election, President Trump has repeatedly noted his dissatisfaction with the Iran nuclear deal and has claimed that he would get a better deal for the US. In light of these comments, there is a significant possibility that US sanctions on Iran will be escalated or the nuclear deal maybe abrogated. Strengthened Sanctions There are a number of ways in which the new Administration could go about ratcheting up sanctions or abrogating the deal, including: 1) unilaterally invoking the snapback mechanism at the UN; 2) ceasing to renew waivers for countries that import Iranian oil; 3) ramping up OFAC designations; or 4) relying on Congress to pass additional statutes. Reaction from Iran In any of these scenarios, the Iranians would likely claim a US breach and/or restart their nuclear program. Impact Conservative Posture Most large US financial institutions have adopted a conservative approach to Iran and refrained from availing itself of Iran-related General Licenses or areas of liberalization and will continue to do so. Reduction of Iran Risk A reimposition of international sanctions or US secondary sanctions may actually reduce Iran-risk, as significant differences between major sanctions programs (e.g., US and EU) can create increased risk for international financial institutions.
Potential Changes under New Administration Cuba On October 14, OFAC announced a fifth round of easing of sanctions against Cuba since the US began normalizing relations with Cuba in December 2014. While important elements of the Cuban sanctions program are held in place by statute and thus require legislative action to remove, the Administration s actions create broad areas of newly permissible activity and represent a significant change in the Cuban risk landscape. While many transactions processed by Citi s non-u.s. subsidiaries are now permissible under the recent changes in regulations, Citi still considers Cuba a comprehensively sanctioned country. Conflicting Statements Uncertain Future During his campaign, President Trump made conflicting statements on whether or not he supported the Obama administration s approach to normalized relations with Cuba, thus creating significant uncertainty around the future direction of this sanctions program. Push for More Reforms Several key surrogates of President elect Trump have expressed dissatisfaction with the current state of relations with Cuba, and have suggested that the Trump Administration will get a better deal with Cuba. It is unclear what this might entail, it could mean pushing for Cuba to make greater moves toward democratization and respect for human rights, or it could mean pushing Cuba to become a friendlier environment for US businesses. Congress Influence Regardless, the Administration s discretion with regard to further easing the Cuba sanctions program is complicated by the heavy reliance on statutory measures that are controlled by Congress and not by the executive branch. Impact Conservative Posture = Moderated Risk Exposure Because most US banks have maintained a conservative posture on Cuba, a reversal of the easing of Cuba sanctions would not necessarily pose a significantly increased sanctions risk. U-turn Allowance The one area which has significantly benefitted from the liberalization of Cuba sanctions is the U-turn allowance, which has made it possible for US banks to process thousands of transactions that it previously had to block or reject. 7
Potential Changes under New Administration Improved Relations During and following his campaign, President Trump made a number of statements praising Russian President Vladimir Putin and suggesting that he intended to improve relations with Russia, prompting observers to question the future direction of the sanctions program. Key Actors are Close to Russia In addition, observers have interpreted several projected appointments to Trump s cabinet, particularly that of Exxon-Mobil CEO Rex Tillerson as Secretary of State, as moves that may be friendly to Russia. Congress Stance While the Trump Administration will exercise full discretion over the suite of executive measures that comprise the majority of the Russia sanctions program, Members of Congress, on both sides of the aisle, have vowed to stay tough on Russia. 8 Russia In March 2014, the US began to sanction persons in Russia and Ukraine who had undermined democratic processes and threatened the peace, security, stability, sovereignty, and territorial integrity of Ukraine. The Russia Sectoral Sanctions program poses significant implementation challenges due to the global economic significance of Russia, the size of Citi s Russian franchise, and the specific nature of the sanctions prohibitions. In order to effectively implement these sanctions, Citi developed a risk-based and cross-functional approach with extensive controls covering multiple platforms and business units. Impact EU Sanctions If President Trump were to unilaterally ease or remove Ukraine/Russia sanctions, prohibitions by the European Union would still be in force. However, most observers agree that a weakening of US sanctions on Russia would likely lead to an easing in EU sanctions as well. Reduction of Sanctions Risk For financial institutions with exposure to Russia, an easing of this sanctions program could lead to a decrease in related sanctions risk.
North Korea On March 16, 2016, President Obama issued an Executive Order (E.O.) Blocking Property of the Government of North Korea and the Workers Party of Korea, and Prohibiting Certain Transactions With Respect to North Korea. The E.O. implemented the North Korea Sanctions and Policy Enhancement Act and established a comprehensive sanctions regime against North Korea similar to those already in place against Iran, Cuba, Sudan, and Syria. In March and December 2016, in response to illegal North Korean nuclear tests, the UN Security Council adopted unprecedentedly robust sanctions against North Korea, which prohibit the establishment or maintenance of correspondent relationships with North Korean banks, limit the levels of key North Korean exports, and prohibit North Korean diplomatic personnel from holding more than one bank account. In September 2016, the FBI took action and OFAC imposed sanctions against the Chinese firm Dandong Hongxiang Industrial Development Co. and four of its executives who are accused of utilizing front companies to evade sanctions related to North Korea's nuclear program. Funds from these front companies flowed through accounts held at foreign banks that maintain US dollar accounts at domestic financial institutions. Potential Changes under New Administration Strengthened Sanctions During and following his campaign, President-elect Trump and his surrogates made a number of statements promising to go after North Korea. China: Conflict or Cooperation The major challenge of exerting greater pressure on North Korea through sanctions is the need to rely heavily on China, which acts as North Korea s patron and with whom North Korea does the vast majority of its trade. During the campaign period, President-elect Trump repeatedly spoke of taking on China, and, during the transition, Trump has shown a willingness to antagonize China, including placing a call to the President of Taiwan. Moves like these could complicate bilateral cooperation on North Korea. Impact Ensure Proper Controls Although North Korea poses relatively limited compliance risk due to its historic isolation from the global economy and the existence of a longstanding multilateral sanctions regime, in response to the imposition of unprecedented new sanctions financial institutions should review their control environment to ensure that does not directly or indirectly support activity involving North Korea. Pressuring Chinese Financial Institutions If the US government wishes to apply more pressure to North Korea, it will likely do so by leveraging US banks to pressure Chinese financial institutions to cut off North Korea. This could force challenging situations in dealing with Chinese law or Chinese correspondent banks. 9
Background OFAC Sanctions Regimes US sanctions regimes are expanding in both scope and impact Currently, OFAC administers and enforces over 30 economic and trade sanctions programs, which have become more complex and innovative: Russia/Ukraine-related: In 2014, OFAC introduced sectoral sanctions to target Russia s financial and energy sectors to limit Russia s access to U.S. capital and debt markets Cuba: Five rounds of amendments since the President announced the December 2014 easing of sanctions Iran: Majority of EU/UN sanctions terminated in 2016 but most primary U.S. sanctions remain in place 10
Evolving Sanctions Regimes While a growing number of countries have sanctions regimes, none come close to the US in terms of number of programs or entries. Outside the US, there is almost no record of enforcement action related to sanctions violations. The EU, which many view as having the strongest sanctions regime outside of the US, openly acknowledges that implementation and enforcement are major shortcomings. The UK regulator OFSI recently published a consultation paper which sought feedback from the financial services industry on the proposed process for imposing monetary penalties for breaches of financial sanctions. We are likely to see increased activity from OFSI who appear to be aligning their model more closely to that of OFAC and we should expect to see increased enforcement activity from the UK regulator in the near future. 11 Weak implementation and enforcement procedures appear as additional limitations to the effectiveness of sanctions regimes. Once restrictive measures are adopted, the resources dedicated to monitoring and compliance at EU level fall short of what is effectively required In the absence of an EU agency akin to the US Office of Foreign Assets Control (OFAC), there is no standard procedure to verify the degree of compliance. With disparities in the capacity (as well as willingness) of member states to implement, monitor and enforce sanctions, loopholes which targets can exploit are more likely to appear. --On Target? EU Sanctions as Security Policy Tools, EU Institute for Security Studies, 2015
Background Non-U.S. Enforcement From 2009 to the present, a period during which US enforcement action related to sanctions violations totaled over $17.5 billion, there was just a single significant case of a financial penalty being imposed by a non-us authority related to potential sanctions violations a 2010 penalty imposed by the UK s Financial Services Authority against Royal Bank of Scotland for 5.6 million ($8.47 million) for failure to conduct appropriate CDD and sanctions screening. This penalty represents 0.05% of the total sanctions-related penalties imposed during this time period, whereas 99.95% of all financial penalties were imposed by US authorities. 12 * As of March 2017
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