OFAC laws and European/non-US inability to comply

Why non-US entities keep falling foul of the US Sanctions & AML regime

I was delighted to be invited by Courtney West to give a lecture at St John’s University, New York on the topic of the US Sanctions & AML integrated regime. In particular, the focus was on the inability of non-US parties to fall in line with OFAC and US Sanctions policy, with breaches leading to multi-billion dollar fines for major non-US financial institutions. In stark contrast to the way that the rest of the world handles money laundering and terrorist financing offences separately from sanctions, the US integrated Sanctions & AML regime applies strict liability to sanctions breaches, which can be based on mere “apparent violations” which are all that is required for US authorities to take major punitive action.

The threat of US Sanctions & AML penalties is immense, and we discussed the extraordinary number of total fines issued by the US of $23.52bn between 2008-2018 for KYC, AML and Sanctions-related offences. During this time, the US fined European banks 5 times more than US banks. Even more significant, the figure for the Department of Justice fines in this time came to $14.6bn, with New York Department of Financial Services (NYDFS) issuing a further $3.6bn in monetary penalties.

In stark contrast to the US level of penalties and those issued by specific US agencies from 2008-2018, the entire European Union (EU) levied a mere $1.7bn in penalties – with the vast majority emanating from the UK. Moreover, in a further example of the major difference in handling KYC, AML and Sanctions-related offences around the world, with the US far and away the most robust enforcement actor, Asia-Pacific issued a mere $609m in fines from 2008-2018.

It is worth underlining the way that few outside the US fully appreciate the depth, power and reach of the US integrated Sanctions & AML/CTF regime. With the USA PATRIOT Act passed in the aftermath of 9/11, and major powers accorded to US authorities via its Section 311, such as the ability to cut off entire jurisdictions, entities, individuals and even transaction types from US dollar access, the US has unrivalled powers in the Sanctions and AML space in terms of enforcement and reach.

With US Sanctions breaches extending to primary and secondary Sanctions offences, actions involving non-US parties in non-US$ transactions and outside of US borders can all be caught up in potential US Sanctions breaches. Importantly, the thrust of US “overseas” investigations will always have a Sanctions edge. This is because the US agencies tasked with protecting the US from overseas Sanctions breaches such as the US Treasury’s Office of Foreign Assets Control (OFAC) will always be looking for US Sanctions breaches, which includes money laundering and terrorist financing and related offences. This focuses on the substance of core US Sanctions offences. With US penalties so high, this constitutes a major potential threat for non-US actors.

The contrast with the non-US approach to Sanctions and AML could not be greater. The US is the only fully integrated Sanctions & AML/CTF regime in the world. In contrast, of the major global players on the Sanctions and AML/CTF front, such as the UN and the EU, the policy approach is very different, and far less of an immediate threat. The EU focuses on money laundering and terrorist financing offences separate from Sanctions offences, and despite wide-ranging offence types based on FATF’s globally accepted 40 Recommendations, it does not possess a robust enforcement policy. This is because enforcement is left to individual EU Member States, with varying degrees of effectiveness. In terms of Sanctions policy, the EU tends to follow UN Security Council Resolutions and lacks the robust enforcement policy weaponry at the current disposal of the US – many of whose Sanctions are rooted in UN Security Council Resolutions and FATF predicate offences.

The US dollar is undoubtedly the most important policy leveraging tool available to the US. With it, the various measures included in the USA PATRIOT Act, such as Section 311 5th Special Measure, which can lead to entire jurisdictions, institutions and entities being cut off from the US dollar and US markets , have far more bite than, say, EU or UN-driven policies. Furthermore, in pushing for settlements, the US has a further level of suasion – namely its relatively lower bar to corporate criminal liability relative to most other jurisdictions around the world. This means that firms (particularly corporates or financial institutions) under US investigation would far rather settle a monetary fine than risk the major issues that a corporate criminal liability guilty plea might entail – when one considers the major impact this could have on credit facilities, financing possibilities and so on.

In terms of available defences to the reach and power of US extra-territoriality, there have been few truly successful challenges to date. The EU has come up with its 1996 Blocking Statute and subsequent Blocking Statutes primarily designed to curb the power and influence of US extra-territoriality, but these initiatives have, to date, proven somewhat unsuccessful, as the risk of being cut of from US dollars is too great for most non-US entities to be worth taking. For similar reasons the EU’s INSTEX payments system (introduced in 2018 after the US re-imposed sanctions on Iran) has not been effective, save for isolated transactions involving humanitarian aid to Iran.