In recent weeks, the New York State Department of Financial
Services (NYDFS) has increased its enforcement and compliance
activities related to US sanctions law, targeting foreign financial
institutions operating in New York, as well as non-US
reinsurers. The latest bank to settle with the New York
regulator over apparent sanctions-related violations of New York
law is Bank of Tokyo Mitsubishi-UFJ, Ltd (BTMU). This follows
similar settlements by NYDFS with Standard Chartered Bank and with
Deloitte Financial Advisory Services within the past year. In
addition, last week NYDFS sent letters to approximately 20 non-US
reinsurers requesting in-depth information about their compliance
with the Iran Freedom and Counter-Proliferation Act of 2012
(IFCPA). These activities signal that NYDFS will likely
continue its enhanced scrutiny of foreign banks and reinsurers for
the foreseeable future, bringing increased compliance risks for
entities operating under the New York regulator's
jurisdiction.
Bank of Tokyo Mitsubishi Settlement
On June 20, 2013 New York Governor Cuomo announced that BTMU has
agreed to a $250
million settlement with NYDFS regarding apparent New York
banking law violations related to transactions involving sanctioned
countries and entities, including Iran, Sudan, and Burma (also
known as Myanmar). This settlement follows BTMU's
December 2012 settlement of $8.6 million with the Office of
Foreign Assets Control (OFAC) of the US Treasury Department.
According to the NYDFS settlement agreement, from at least 2002 to
2007 BTMU violated New York banking law by routing US dollar
payments through New York after Tokyo employees first removed
information identifying sanctioned parties. The conduct
included written operational instructions for Tokyo employees to
remove names of final receiving banks in order "to avoid
freezing of funds". The US dollar payments BTMU cleared
through New York during this period included approximately 28,000
payments worth close to $100 billion involving Iran, as well as
additional payments involving Sudan, Burma, and certain entities on
OFAC's Specially Designated Nationals list.
In addition to the $250 million penalty for this conduct, BTMU
must also install an independent consultant for one year to review
BTMU sanctions compliance programs, policies, and procedures.
The consultant will have the authority to recommend needed
corrective measures and oversee their implementation, and will
report to NYDFS.
BTMU's related December 2012 OFAC settlement followed an
internal investigation and voluntary self-disclosure to OFAC by the
bank relating to apparent violations of US sanctions laws from 2006
and 2007 involving Burma, Iran, Sudan, and Cuba, as well as
sanctions targeting weapons of mass destruction proliferators and
their supporters. The civil settlement reflected OFAC's
finding that the apparent violations were egregious, despite
BTMU's substantial cooperation and no prior history of OFAC
violations, based on the following facts and circumstances:
- BTMU's conduct hid the involvement of the US sanctions targets and displayed reckless disregard for US sanctions;
- The BTMU Tokyo Operations Center general manager knew or had reason to know that its procedures instructed employees to manipulate payment instructions;
- BTMU's conduct conferred a substantial economic benefit to OFAC sanctions targets; and
- BTMU is a large, commercially sophisticated financial institution.
BTMU's substantial settlement with NYDFS reflects the state
regulator's increasing activity in cases involving US sanctions
and foreign-based banks operating in New York. In August
2012, the regulator reached a precedent-setting $340
million settlement with Standard Chartered Bank regarding that
bank's dealings with Iran. In the reverse order of the
BTMU settlements, in December 2012, Standard Chartered also reached
a $132 million settlement with OFAC for the same activity.
The BTMU and Standard Chartered settlements illustrate NYDFS's
focus on sanctions violations by New York banks, and at least in
these two cases, their willingness to demand settlements for
alleged violations of New York banking law that are
substantially in excess of the settlements reached with US
federal regulators. The BTMU case is also significant as it
is the first Asia-based bank targeted for sanctions violations by
both OFAC and the NYDFS.
Non-US Reinsurers' Compliance with Iran Sanctions Law
A new set of Iran sanctions went into effect on July 1st
pursuant to the IFCPA and
Executive Order 13645, which impose sanctions on certain
activities involving the Iranian energy, shipbuilding, shipping,
and automotive sectors. The implementation of these
sanctions, which target, among other things, the provision of
insurance, reinsurance, and underwriting services for any activity
for which sanctions have been imposed under US law, was accompanied
by letters from NYDFS to a group of non-US reinsurers. The
letters request survey information about compliance with the IFCPA
from non-US reinsurers who are part of a NYDFS "Certified
Reinsurer" program.
The new IFCPA sanctions significantly broaden prior US
extraterritorial sanctions targeting the insurance and reinsurance
industries' involvement in Iran-related transactions.
They provide for the imposition of sanctions against any person who
knowingly provides insurance or reinsurance (1) covering
Iran-related activity for which sanctions have already been imposed
under the various extraterritorial sanctions statutes; (2) covering
Iran-related activity in any targeted sector such as energy,
shipping or ship-building, or involving targeted materials such as
graphite, raw or semi-finished metals, or coal, or involving any
persons designated for sanctions in connection with Iran's
efforts to acquire weapons of mass destruction or its support of
terrorism; or (3) issued to or for any Iranian person listed as a
specially designated national or blocked person by the Office of
Foreign Assets Control (OFAC) in the US Treasury Department (except
for certain financial institutions). The President can waive
the imposition of sanctions in some circumstances if the insurer or
reinsurer is determined to have exercised appropriate due diligence
in establishing and enforcing controls designed to avoid engaging
in sanctionable activity.
The NYDFS letters ask unusually detailed questions about various
aspects of the reinsurers' efforts to comply with a law that is
just now going into effect, and also asks reinsurers to name its
insureds who may engage in Iran-related transactions. The
information requested includes, among other things:
- the lines of business that may be subject to sanctions under the IFCPA;
- policies and procedures in place to ensure compliance with the IFCPA;
- an explanation of how the company ensures that underwriters correctly ascertain whether a policy may cover transactions that are prohibited by the IFCPA;
- information the company requires from maritime policyholders relating to each shipment covered;
- the rights the company has to verify a maritime policyholder's representations;
- the company's internal response to press reports that particular commodities trades by Glencore Xstrata and Trafigura potentially violated the US Iran sanctions regime;
- a copy of any policy that may cover the Glencore Xstrata and Trafigura transactions;
- a list of all insureds that the company has identified as potentially engaging in business with Iran or any entity or person affiliated with Iran; and
- specific aspects of the company's due diligence relating to Iran sanctions compliance.
Unlike NYDFS's settlements with non-US banks, its outreach to reinsurers regarding US sanctions law appears primarily focused on compliance – rather than enforcement – measures at this stage, although that could change based on the information it receives in response to its letters. For more detailed information regarding NYDFS outreach to reinsurers, see our recent advisory.
We will continue to monitor sanctions related developments.
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