Washington, D.C. (October 25, 2024) - On July 26, 2024, the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") announced a substantial $7,452,501 settlement with State Street Bank and Trust Company ("State Street") and its subsidiary, Charles River Systems, Inc. ("Charles River") related to its potential civil liability for apparent violations of OFAC's Ukraine-/Russia-Related Sanctions (the "Sanctions"). The settlement reflects OFAC's continued aggressive enforcement of U.S. sanctions laws and the importance of complying with OFAC's Economic Sanctions Enforcement Guidelines.
The Apparent Violations
The settlement concerns actions by Charles River, before it was acquired by State Street. Charles River is alleged to have violated Ukraine-/Russia-related Sanctions by mischaracterizing the invoice dates of transactions with sanctioned entities, in an attempt to qualify the subject transactions to narrow exceptions in the Sanctions where those transactions would otherwise be prohibited.
From 2008-2022, Charles River initiated and maintained various business relationships with Sberbank and VTB Bank subsidiaries subject to Directive 1. Between 2014 and 2020, Charles River was involved in, or aware of, the reissuance or redating of invoices for these subsidiaries to prevent associated payments from being rejected. OFAC's settlement agreement with State Street Bank asserts that Charles River made multiple amendments to its agreements with the sanctioned entities, and mischaracterized invoice dates to disguise the transactions as if they were permitted under Sanctions exceptions, resulting in at least 38 prohibited dealings. The prohibited conduct continued for 19 months after State Street acquired Charles River in 2018.
The Applicable Law
Executive Order 13662 - issued in March 20, 2014, in response to Russia's invasion and annexation of the Crimea - attempts to hold entities and individuals that support Russia's actions concerning Crimea accountable by restricting trade with those individuals and entities. Directive 1 issued under E.O. 13662 addressed financing and loan agreements with designated entities and attempts to minimize consequences to U.S. business, especially relating to installment agreements that predate E.O.13662.
Both Sberbank and VTB Bank and their majority-owned subsidiaries are sanctioned Russian financial institutions listed under Directive 1. Consequently, unless there was a General License to allow transactions with these sanctioned financial institutions, State Street and Charles River were prohibited from engaging in transactions with them.
The Settlement
The statutory maximum civil penalty could be as high as $13,550,002, the base civil monetary penalty applicable per 31 C.F.R Part 501, app. A. and OFAC determined that neither State Street Bank nor Charles River voluntarily self-disclosed the violations, which is an aggravating factor for penalty assessment.
In assessing its penalty, among other factors, OFAC found that:
- Charles Rivers' redating and reissuing of invoices to
disguise them as permitted transactions was reckless conduct;
- After Charles River was notified that the transactions were
rejected by other U.S. financial institutions, it persisted in
attempting to collect fees pursuant to the transactions;
- At least 18 Charles River staff members were aware of the
transactions, and said activity continued for 19 months after State
Street acquired Charles River, ignoring screening alerts from State
Street's own software; and
- Charles River is a commercially sophisticated company with resources to enforce a compliance program.
In determining the penalty, OFAC also considered some mitigating factors:
- Neither State Street nor Charles River has received a penalty
notice from OFAC in the five years preceding the earliest date of
the prohibited transactions;
- State Street implemented remedial measures following an
internal investigation; and
- Although OFAC had previously received reject reports from Charles River's U.S. financial institution, State Street reported on the matter to OFAC during the investigation by disclosing additional apparent violations, submitting detailed documentation, responding quickly and fully to OFAC's requests, and entering into tolling agreements.
It should be noted that had either State Street or Charles River voluntarily disclosed the illegal conduct, OFAC's penalty could have been nominal, in contrast to the assessed $7,452,501. Voluntary disclosure of sanctions violations can considerably reduce any financial penalty that might be assessed. (See our earlier Alert regarding voluntary disclosures of sanctions violations.)
Takeaways
Appropriate due diligence should be conducted when acquiring companies with an international footprint, especially those that have transacted with entities proximate to sanctioned countries or organizations. When violations of U.S. trade regulations and laws are discovered, businesses are best served if they voluntarily self-disclose to avoid the aggravating factors of OFAC's penalty guidelines.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
