Recent OFAC Penalty Highlights Broad Jurisdiction of US Sanctions, Law Firms Say

The Office of Foreign Assets Control’s August penalty against a Romanian bank and its U.S. parent company underscored the various sanctions risks during acquisitions and the many compliance issues foreign subsidiaries can cause for their owners, law firms said. The settlement agreement particularly served as a reminder to non-U.S. companies that OFAC’s sanctions jurisdiction can extend far beyond the U.S., and there are “no shorthand compliance measures that can guarantee protection,” Arnold & Porter said in a September alert.

OFAC fined Romania-based First Bank SA and its parent, JC Flowers, $860,000 for processing nearly 100 transactions worth about $3.5 million through U.S. banks on behalf of sanctioned parties (see 2108270052). Arnold & Porter said First Bank’s “lack of understanding” of U.S. sanctions was “typical” of the many other foreign banks targeted by OFAC for sanctions violations. But what was more notable, the firm said, was OFAC’s determination that a number of the bank's euro-denominated payments were cited as U.S. sanctions violations.

Those transactions violated U.S. sanctions because they occurred after U.S.-based JC Flowers bought First Bank, Arnold & Porter said. “Even though the payments fell outside the U.S. financial system,” the firm said, “they were still prohibited by U.S. sanctions because the bank is owned by a U.S. person.”

The settlement “emphasizes the broad scope of U.S. sanctions regulations,” Herbert Smith said in a recent alert. “Non-U.S. companies should continue to conduct due diligence to determine whether a transaction involves a U.S. nexus, including U.S. persons, U.S. dollars, or the U.S. financial system,” the firm said. Arnold & Porter said the penalty showed “that U.S. sanctions reach outside the United States in many dimensions,” and that it is a “common misimpression” that avoiding U.S. dollars is “sufficient to avoid U.S. sanctions.”

The settlement was among several recent penalties issued by OFAC in which sanctions violations occurred after a foreign company was bought by a U.S. parent, the firm said, “triggering sanctions jurisdiction where the company was previously engaged in activities with sanctioned countries or persons.” OFAC will place the “ultimate responsibility” on a parent company for its “group-wide sanctions compliance,” Arnold & Porter said, even through difficult compliance challenges, such as language barriers between a parent and a subsidiary and when a subsidiary may be located in a country with different sanctions laws.

“While not an acceptable excuse from OFAC’s perspective, it is imaginable that First Bank’s local Romanian employees may not have appreciated that Iranian-related payments may violate OFAC regulations even when denominated in non-U.S. dollars,” the firm said. “A U.S. parent company, however, must have an understanding of the sanctions implications created for all its subsidiaries and affiliates due to the parent being a U.S. person.”

JC Flowers was fined because the bank’s compliance training and procedures “did not address the risk that First Bank could be indirectly exporting financial services through the U.S. financial system to sanctioned parties or comprehensively sanctioned jurisdictions, Herbert Smith said. Arnold & Porter said a robust compliance program can help avoid these types of penalties “down the line,” even for companies that are majority-owned and operated outside the U.S. “These transactions may have been avoided with rather basic procedures and training at a relatively minor expense compared to OFAC’s penalty,” the firm said.