The U.S. Department of Justice and the New York District Attorney’s Office, together with the Office of Foreign Assets Control and federal and state bank regulators, have brought a number of cases in 2009 – 2010 against foreign financial institutions that clear dollar transactions through the United States involving prohibited entities and individuals under U.S. sanctions regulations. In the past, banks not subject to U.S. jurisdiction have generally avoided penalties under these regulations. The U.S. Government, however, has widened its enforcement to target financial institutions outside the U.S. for allegedly “causing” U.S. persons to violate U.S. sanctions regulations.

Deferred Prosecution Agreements and Settlements
Under deferred prosecution agreements, U.S. Department of Justice (DOJ) and New York District Attorney’s Office (NYDA) bring charges by filing a criminal information but agreeing not to prosecute the charges, provided the defendant complies with certain requirements outlined in the settlement. The requirements frequently include stipulating to the facts constituting the alleged violations, paying a monetary penalty, and instituting compliance procedures to prevent future violations. If the defendant abides by the terms of the agreement for a specified period, the charges are dismissed. Failure to comply with the agreement allows the DOJ and NYDA to proceed against the defendent on the basis of their prior stipulated facts.

Lloyds TSB Bank Plc. (Lloyds). Lloyds’ January 2009 deferred prosecution agreements with the DOJ and NYDA included a $350 million payment to settle allegations that Lloyds allowed Iran and Sudan to access U.S. financial institutions in violation of U.S. sanctions regulations and New York criminal law. Lloyds internally “stripped” customer names, bank names, and addresses from SWIFT payment messages to allow them to pass undetected through filters at U.S. correspondent banks. Had the messages contained transparent data concerning the parties, the U.S. correspondent banks would have been required to reject or block the transactions in compliance with U.S. sanctions regulations.

As part of the settlement, Lloyds agreed to employ an independent pre-approved consultant to review and report on five years of transactions. In addition, Lloyds agreed to comply with the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking. In return, the DOJ deferred prosecution for two years and will subsequently dismiss the charges provided Lloyds remains in full compliance with the terms of the settlement.

In December 2009, Lloyds entered into a separate settlement with the Office of Foreign Assets Control (OFAC) agreeing to a $217 million fine, which was credited against the previous payment, and agreed to conduct annual reviews for two years of its policies and procedures and a “statistically significant” review of payments cleared through the United States.

Australia and New Zealand Bank Group, Ltd. (ANZ). In its August 24, 2009 OFAC settlement, ANZ paid $5.75 million to settle allegations of violations of the Sudanese Sanctions Regulations and the Cuban Assets Control Regulations. OFAC alleged that between 2004 and 2006, ANZ illegally processed 31 transactions through U.S. correspondent accounts totaling in the aggregate approximately $106 million. ANZ allegedly manipulated the SWIFT messages “stripping” them of any reference to Sudan or Cuba. ANZ’s actions concealed the identity of the sanctions targets and impeded U.S. financial institutions from identifying the restricted transactions.

OFAC agreed to mitigate the penalty based on three predominant factors. First, although ANZ did not voluntarily disclose the violations, ANZ cooperated in conducting an extensive review of the transactions and brought to OFAC’s attention additional transactions of which OFAC was not aware and which ANZ did voluntarily disclose. Second, ANZ promptly initiated a remedial policy. ANZ re-engineered its operating model to enhance its ability to identify and resolve operational gaps and weaknesses. ANZ agreed to continually audit its compliance model to ensure that future transactions that would be in violation of OFAC’s regulations are not processed by or through U.S. financial institutions. The Australian Prudential Regulation Authority also agreed to monitor the results of ANZ’s internal review. Third, ANZ had not been subject to an OFAC enforcement action in the five years preceding the transactions at issue.

Credit Suisse AG (Credit Suisse). On December 16, 2009, DOJ, NYDA and OFAC announced a record-breaking $536 million settlement with Credit Suisse. The settlement documents alleged Credit Suisse’s involvement in thousands of concealed financial transactions with OFAC target countries processed through U.S. correspondent banks. Credit Suisse allegedly developed procedures to instruct clients on how to structure transactions and Credit Suisse altered payment paths and “stripped” payment messages of any reference to the target countries.

In addition to the fine, the settlement subjects Credit Suisse to a cease and desist order and requires implementation of a transparent global regulatory compliance program. The compliance program must include training for Credit Suisse employees on OFAC-related issues, an audit program designed to test for compliance, and an annual review of the compliance program by qualified personnel.

ABN Amro Bank N.V. (ABN AMRO)/Royal Bank of Scotland (RBS). In 2006, ABN AMRO agreed to a cease and desist order with OFAC and the Board of Governors of the Federal Reserve System. ABN AMRO was assessed a $40 million penalty, which also satisfied a concurrent $30 million FinCen penalty. The violations, which were voluntarily disclosed, involved ABN AMRO’s overseas branches, which removed references to entities in which Libya or Iran had an interest before forwarding wire transfers, letters of credit and U.S. dollar checks to ABN AMRO branches in New York and Chicago. This 2006 settlement, however, did not address criminal penalties.

On May 4, 2010, ABN AMRO, which had since been acquired by RBS, entered into a deferred prosecution agreement with DOJ agreeing to forfeit $500 million in connection with a two-count criminal information. Specifically, ABN AMRO waived indictment on one count of violating the Bank Secrecy Act and one count of conspiracy to defraud the U.S. by violating the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).

The 2010 deferred prosecution agreement details a much broader pattern of violations. The factual statement accompanying the deferred prosecution agreement alleges that from 1998 through 2005, ABN AMRO conducted transactions valued at $500 million in violation of IEEPA, TWEA and the Bank Secrecy Act involving targets of U.S. economic sanctions and ignoring OFAC compliance obligations. ABN AMRO removed or altered names and references to target countries from payment messages. The “stripping” procedures allowed the transactions to pass undetected through filters at U.S. correspondent banks, where they would otherwise have been blocked and reported to OFAC. In addition to altering the payment messages, ABN AMRO failed to maintain adequate anti-money laundering procedures and processes.

ABN AMRO provided prompt and substantial cooperation, committed substantial resources to investigate transactions, and agreed to enhance its compliance policy to ensure transparency. In light of ABN AMRO’s remedial actions, DOJ agreed to recommend dismissal of the information in one year provided ABN AMRO continues to fully cooperate.

Policy Trends and Compliance Risks
These cases are a direct result of the United States’ policy to strengthen U.S. sanctions against Iran, as well as other countries, without explicitly requiring foreign financial institutions to comply with extraterritorial U.S. legal requirements. These cases also reflect a growing trend among enforcement agencies to cooperate on sanctions enforcement, bringing to bear not only the threat of higher monetary penalties but also heightened scrutiny from bank regulatory authorities and potential criminal fines and imprisonment. Regardless of the legal merits and possible defenses that may have been available, these institutions evidently decided to settle rather than face consequences that could have been even more serious.

A number of global financial institutions with headquarters outside the United States have adopted their own internal policies to comply with U.S. sanctions regulations as though they were U.S. institutions, judging that the risks of non-compliance and potential adverse impact on their business in the United States outweighed the risks of continuing to engage in business with countries targeted by U.S. sanctions.

The expanded reach of U.S. enforcement to activities that cause U.S. persons to commit violations within the United States presents a serious compliance risk. Financial institutions that clear dollar transactions through the United States must ensure that they comply with U.S. sanctions regulations.

If you have any questions about the content of this advisory, please contact:

Christopher R. Wall, Washington, DC, +1. 202.663.9250, cwall@pillsburylaw.com

Thomas M. deButts , Washington, DC, +1. 202.663.8872, debutts@pillsburylaw.com

This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice.

© 2010 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved.

According to the ASI settlement agreement:

• In January 2006 ASI violated the Iranian Transaction Regulations (ITR) when it shipped communications equipment from the United States via the Netherlands to Iran.

• In February 2007 ASI violated the ITR when it attempted to ship aerospace grade aluminum from the United States via Netherlands to Iran and when it exported those items from the United States to the Netherlands with knowledge the items were destined for Iran.  (Apparently that shipment was stopped in the Netherlands.)

• In March 2007 ASI violated the ITR when it attempted to ship polymide film from the United States indirectly to Iran.  In July 2007 ASI violated the ITR when it attempted to arrange for the goods to be shipped to a fictitious purchaser in Dubai.   (Apparently after the stuff above was stopped in the Netherlands they figured they should ship via Dubai.)

ASI and the two Kraaipoels each where charged with one charge of conspiracy to violate the EAR.  They were each fined the maximum amount of $250,000 per violation, but the penalty is suspended for three years if they don’t have additional violations.  The charging letters said that in committing their acts of conspiracy they “devised and employed a scheme to purchase these items from the US on behalf of Iranian customers and give US manufacturers false information regarding the ultimate destination, end-user and end-use of the items, thereby causing false export control documents to be submitted to the US Government.”

Unfortunately for these guys, the total value of the transactions was $63,511, and they probably didn’t get paid for the two transactions that apparently didn’t get to Iran.  Clearly, for the Kraaipoels, crime didn’t ‘paay.’

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OFAC alleges that the company, “actively manipulated the SWIFT messages related to the Sudanese transactions by removing references to Sudan or the names of entities subject to sanctions in the US, thereby concealing the identities of the targets of US sanctions and impeding the ability of US banks to detect these violations.” In OFAC’s recent announcement of the case they indicated that although the banking group did not voluntarily disclose the “apparent” violations, “they did cooperate with OFAC by conducting an extensive review of the transactions.”

As part of the banks remedial response to the violations they have re-engineered and enhanced their policies regarding OFAC policies and procedures to ensure effective controls. As part of their settlement, the company will examine and revise its policies/procedures to try to mitigate any further OFAC violations. The company must also report these finding to OFAC and the Australian Prudential Regulation Authority who will continue to monitor the resolution of any “adverse findings.”

More information:

• OFAC Announcement (PDF)

Under the OFAC rules, HP’s actions might be completely legal because the rules allow US exporters to deliver products to a foreign company reseller even if the US company knows the reseller might eventually deliver a portion of its inventory to Iran-delivery of an inventory not substantially intended for Iran does not mean the exporter has “knowledge” under US Iran embargo rules. If an exporter has a shipment that it knows or suspects is specifically (or substantially) destined for Iran, the exporter may not export. In certain cases, the US embargo on Iran does not prohibit foreign-made HP printers with minimal US content to be sold to Iran.

Most likely Boston.com does not understand that the US created its Iran embargo with the full intention of allowing US companies to deliver certain goods to resellers in certain cases and to allow certain foreign-made products (even if they have a US brand name) to be sold to Iran. I haven’t been to law school, but it seems to me that taking advantage of a provision that the US Government intentionally put in the rules is not breaking the law.

And, of course, we shouldn’t really be surprised to learn that a wide range of US brand name products are available in Iran: I have never been there, but I bet you if I went there today I could find Dell computers and Microsoft software to use along with my HP printer. And if I do go, maybe I will buy an iphone there and call you to tell you about the cool bootleg CDs I loaded on my ipod I purchased there.

LEGAL NOTE: I was just joking: Of course I would never purchase such things if I went to Iran. I mean, when I was in Dubai last year, I checked the label of the pistachio nuts I wanted to buy in a small shop. When I found out they were imported from Iran, I did not buy the nuts. Recognizing that I now had reason to suspect that other food in Dubai could be from Iran, I now possessed a Red Flag about the potential Iranian origin of food. As a US person, I cannot receive property of Iranian origin, so I required every restaurant to provide written certificates of origin for all of the food they served me. (OK, I didn’t require the certificate of origins, but I thought about it.)

In the past few years the Bush administration has focused on nailing companies illegally doing business with Iran and on putting Iranian entities and their related parties on lists-once on the lists, in some cases US persons may not do business with the listed parties and in other cases no person may transfer items subject to US jurisdiction to the listed parties. President Clinton began the sanction in 1995 to put pressure on the country to stop funding militant groups and its nuclear programs. In 2004 the SEC put even more pressure on companies to end all ties with Iran when they publicly publicized the names of publicly traded companies that sold to Iran and announced them to be “investment risks”. Xerox, one of the larger companies, ended up terminating all contracts with clients in Iran, Sudan, and Syria causing them to lose more than $7 million in annual revenues. According to boston.com, HP does not mention any sales with Iran in any of its public filings but explains that, “Our products and services are available worldwide.”

Iran appears to be “public enemy number 1” in the view of the US Government. Certain aspects such as freezing assets and listing banks have some significant negative impact on Iran while other aspects of the US embargo on Iran are almost purely symbolic. In my opinion, prohibiting direct exports of HP printers, Dell laptops, and Microsoft Office to Iran does not enhance the national security or foreign policy of the United States. Iran gets all of those items-so if you believe US national security and foreign policy depend on Iran not getting them, well, tell President Obama to add another crisis to his list.

In 2007, the Tehran’s Taliya News estimated that HP had over 41% of the printer market in Iran. A salesman at a printer store in Tehran explains why, “There is psychological impact, but perhaps not the impact that the US government has in mind: Iranian customers are drawn to American products in part because the US government tries to prevent them from reaching Iran. And that makes HP an especially hot seller.”

Sounds like the Iranian desire for HP printers may have something in common with the desire that many Americans have for Cuban cigars. Hahaha, people are people, whether Persian or American!

Article available at:

HP uses third party to sell printers in Iran (Boston Globe)

After conducting research, the GAO concluded that Congress should consider requiring the National Security Council and key agencies to:

1. Assess data on Iran sanctions and complete an overall baseline assessment of sanctions
2. Develop a framework for ongoing assessments
3. Periodically report the results to Congress

Officials did report that U.S. sanctions involving Iran has slowed foreign investment in the country’s petroleum sector, however other evidence indicates that the extent of the reported impact.

The Iranian government has signed contracts since 2003 reported at $20 billion with foreign firms to develop its energy resources. Even further reports show that sanctioned Iranian banks are funding their activities in currencies other than the dollar. Finally, Iran continues to enrich uranium, acquire advanced weapons technology, and support terrorism even after the numerous sanctions provided by the United States.

Iran has strong global ties and a leading role in energy production, making the U.S. sanctions nearly impossible to isolate Iran and reduce its support for terrorism. In some cases, studies show that Iran’s overall trade with the world has grown since the U.S. imposed sanctions, although this trade has fluctuated because of the Iran-Iraq war and the growing oil prices in 2002. This trade did include imports of weapons and nuclear technology.

More information:

www.gao.gov/highlights/d0858high.pdf (PDF)

www.gao.gov/new.items/d0858.pdf (PDF)

More information:

Federal Register 72FR71575.pdf (PDF)

This relatively risky is not surprisingly when you consider that even in the case of flag carrier IranAir, which probably has the most modern fleet in the country, the average airplane has nearly as many years on it as Wilford Brimley.  Their fleet is a collection of ancient Airbuses (300, 310), bygone Boeings (727, early model 747) and fossilized Fokkers (100).  But IranAir’s vintage, yet Western fleet is positively fresh compared to other Iranian carriers, many of which fly Russian aircraft.  The Boeings flying for IranAir were delivered prior to the enactment of the US comprehensive embargo (others are thought to be parked due to a lack of spare parts) while the Airbus airplanes were largely acquired via third party sales.  The US has managed to scuttle direct sales by the European consortium through the EAR’s ten percent de minimis US content threshold for Iran.  Airbus itself promotes its heavy reliance on US suppliers, claiming to spend fully $5.5 billion (or forty percent of its procurement budget) in America (though this figure might also include Canada).  Airbus aircraft engines are particularly relevant when considering the de minimis rule.  First, they are a key component.  We’re not talking lavatory air freshener here.  Second, modern aircraft engines are highly complex, very expensive, and only manufactured by a handful of companies so it is not as if they can be easily sourced from a domestic Iranian manufacturer or third country not troubled by the US embargo.  When it comes to Airbus, two of their three engine manufacturers are US firms (GE and Pratt & Whitney) and the third is a British company, Rolls Royce, which, like Airbus itself, has substantial ties to US suppliers.

Iran does have something in the way of a domestic airframe manufacturing capacity, in the form of Iran Aircraft Manufacturing Industrial Company, which is also known by its Persian acronym HESA.  HESA makes a version of the Antonov-140 (An-140) under license from the Ukrainian firm Antonov.  Someone at HESA presumably snagged a promotion to vice president for dubbing the Iranian-made Antonov the, you guessed it, IRAN-140.  The IRAN-140 effort has experienced its share of difficulties, including the crash of an An-140 carrying a number of senior Antonov engineers to Iran in 2002.  Even if the program results in long-term success, the IRAN-140 is still a medium-range twin-engine turboprop and not the long-range European jetliner coveted by Iran.

So it is not surprising that Iran, shut out by Airbus, is pursuing other strategies.  Last month, Dow Jones Newswires (sorry, no live link) reported Iran’s roads and transportation minister as saying that Iran would attempt to buy 35 new aircraft.  He did not say who would supply the planes.  Even more intriguing is the possibility, reported elsewhere, that Iran might take the IRAN-140 route and license manufacturing technology from Rekkof Aircraft, successor to the bankrupt Dutch aircraft manufacturer Fokker, or even buy out Rekkof (read it backwards) entirely.

What does this all mean?  It seems to say that US embargo on Iran is working, at least at a tactical level, by making Iran’s commercial aircraft fleet too old, discouraging people who have a choice from flying on Iranian airlines, and inhibiting the prospect of a Dubai-style Middle East hub and its concomitant economic benefits.  State Department and OFAC policymakers undoubtedly love the Airbus decision to not sell to Iran.  On the surface at least this appears to be a rare embargo win-win situation – US foreign policy objective achieved without disadvantaging American exporters.

But is this a case of export controls succeeding in the short run but losing over the long haul?  Countries with money (and Iran is reaping the benefits of high oil prices right now) can eventually develop indigenous manufacturing capability to nullify the impact of an embargo.  Perhaps the US embargo forced Iran to move faster toward this objective.  As a result of being targeted by an international arms embargo, apartheid-era South Africa eventually developed a highly competent domestic arms manufacturing capability.

And then there are the unanswered questions.  Will new potential European suppliers complete the US de minimis calculations on the aircraft they sell or technology they license to Iran?  Will US government enforcement personnel inform these potential suppliers of the US embargo issues in the transactions they are contemplating?  Do the Iranians or the US government warn passengers on the old aircraft about possible safety risks?  What would happen if one of the Iranian aircraft crashed and killed a bunch of people?  Would the US relax its policy or celebrate?

Actually, given the number of Iranian plane crashes over just the past few years, we already know the answer to that last one.  It appears to be neither a policy rethink nor the cracking open of champagne bottle, but, simply, nothing.

Syria

President Bush recently signed into law legislation that allows the imposition of sanctions (embargo) against Syria. The legislation essentially allows the President to impose an embargo at his discretion should Syria fail to meet certain benchmarks relating to Syrian troops in Lebanon and the Middle East peace process. The President has not imposed these sanctions, so as of this moment, Syrian controls remain as they have been, with non-EAR99 items require export and reexport licenses.

Libya

The US Libya embargo remains in full effect. After the Lockerbie settlement, in which Libya agreed to compensate families of the victims of the aircraft bombings, the UN lifted multilateral sanctions on Libya. However, the US maintained their unilateral sanctions on Libya, with all export from the US requiring licensing from Treasury and all reexports requiring licenses under the Export Administration Regulations. The US maintained unilateral sanctions out of concern for ongoing weapons proliferation programs.

Libya strong man Muammar Qadaffi recently has taken dramatic steps to end these weapons programs and to open the country up to inspectors in an attempt to have the US sanctions lifted. The US is likely to remain cautious in lifting sanctions. Though continued progress may result in an eventual lifting of the embargo, there does not appear to be any immediate movement on the US side to lift sanctions.

Iran

In a Treasury Press release issued on December 31, 2003 (see http://www.treas.gov/press/releases/js1076.htm), the Office of Foreign Assets Controls eased sanctions on Iran for transactions related to humanitarian relief for the earthquake victims in Bam. Contrary to some press reports which indicate a broader easing of sanctions, the changes are actually very limited in scope. They authorize cash donations to NGO’s for the earthquake victims, authorize humanitarian relief activities, and fast track licensing of NGO’s authorizing relief activity in Iran. There is no other movement to lift the embargo on Iran.