OFAC Fines US Company $7.5M for Violations of Russian Debt Restrictions

A Massachusetts financial services firm agreed to pay a nearly $7.5 million penalty after the Office of Foreign Assets Control accused its subsidiary of revising dates on invoices to skirt certain financial restrictions on dealings in new Russia-related debt. OFAC said the company’s 38 violations of the Ukraine-/Russia-Related Sanctions Regulations involved more than $1.2 million worth of invoices for companies owned by Russia’s Sberbank and VTB Bank.

State Street Bank and Trust Company and its subsidiary, financial technology firm Charles River Systems, didn’t voluntarily disclose the violations, which OFAC called “egregious.” The agency also said Charles River’s staff showed a “limited understanding” of its sanctions obligations and “engaged in a pattern of disregarding the sanctions implications” of the invoice payments.

The violations took place from 2016 to 2020, after the U.S. imposed new sanctions against Russia for invading Crimea in 2014 but before the U.S. imposed a new wave of sanctions against Russia for further invading Ukraine in 2022. And even though OFAC said State Street didn’t acquire Charles River until 2018 and it “performed a post-acquisition onboarding analysis” of Charles River, that analysis didn’t appear to uncover the violations.

OFAC said Charles River began and maintained “business relationships” with majority-owned subsidiaries of Russia’s Sberbank and VTB Bank, which were on OFAC’s Sectoral Sanctions Identifications (SSI) List and were subject to a measure that blocked U.S. people and companies from certain dealings in their new debt “beyond certain specified periods of maturity.” Charles River sold those subsidiaries access to a communications network that allowed customers to privately exchange trade information with their brokers, and the company billed them through invoices.

OFAC said the “issuance of an invoice represents a dealing in debt,” and so the invoices were required to comply with a payment timeline outlined by OFAC’s Russia-related debt restrictions. But the agency said Charles River began to face delays in receiving those invoices after Sberbank and VTB Bank became subject to the restrictions, partly because the U.S. bank that was handling those payments began rejecting the payments for not complying with OFAC’s debt rules.

At least one of the Russian bank subsidiaries told Charles River it was facing “sanctions difficulties,” OFAC said, and asked the firm to change the dates of invoices that were more than 30 days old -- which was the legal threshold at the time -- to “prevent associated payments from being rejected.”

OFAC said Charles River’s staff then began “regularly redating or reissuing ‘old’ invoices” to disguise their original dates and make them appear more recent. The company redated one invoice as many as six times, OFAC said. “As a collections manager stated on one occasion, she would, ‘do whatever it takes to get this invoice paid,’” the agency said.

The company made internal records of the original invoices and dates before sending the revised invoices to at least one U.S. bank, which stopped it from rejecting the payments for being late. OFAC said at least 18 staff members were involved or aware of this, and the company “maintained minimal compliance procedures” before it was acquired by State Street in 2018.

“Charles River staff demonstrated a varying, but limited, understanding of Charles River’s sanctions-related obligations,” OFAC said, “and engaged in a pattern of disregarding the sanctions implications of payment rejections during this time period, despite receiving general sanctions-related payment guidance from the company’s U.S. financial institution.”

OFAC added that State Street’s post-acquisition onboarding analysis of Charles River identified that some of Charles River’s clients were subject to the debt-related restrictions, but that analysis didn’t take into account how the restrictions applied to the company’s late invoice payments. “Subsequent screening alerts concerning payments from SSI customers were manually dismissed without accounting for these restrictions,” the agency said.

OFAC said it could have fined State Street more than $13.5 million for the violations, but it settled on a $7,452,501 penalty, in part, because the company hadn’t received a penalty notice in the previous five years and put in place remedial compliance measures. That included increasing the size of its sanctions compliance review team by 25% in 2022, revising its global sanctions policies, “onboarding prohibitions” for all entities subject to the debt restrictions, putting in place updates to its “alert disposition processes,” introducing training for certain Charles River employees and increasing its sanctions monitoring. State Street also ended all relationships with the SSI entities that were previously Charles River clients by February 2022.

OFAC also said that even though it received payment rejection reports from Charles River’s U.S. bank -- which meant the agency didn’t find out about the violations through a voluntary disclosure from State Street -- the company still “fulsomely reported on the matter to OFAC and during the investigation by disclosing additional apparent violations, submitting detailed documentation, responding quickly and fully to OFAC’s requests, and entering into tolling agreement.”

The agency also listed several aggravating factors that contributed to the penalty, including the fact that Charles River “appeared to at least recklessly violate” the SSI restrictions despite being aware of them. It also “failed to institute or conduct internal compliance procedures to address the risks posed by its relationships with its clients,” and continued the relationships “despite multiple rejection notices” and warnings from its U.S. bank and the fact that at least 18 employees knew about the invoices. It also noted that Charles River’s “activity” continued for 19 months after it was bought by State Street and that the company is a large, “commercially sophisticated company.”

This case highlights the importance of evaluating the compliance issues that “may arise when new clients are onboarded following mergers or acquisitions,” OFAC said. “Even after onboarding is complete, companies should closely monitor their new business relationships for sanctions-related issues that may require preventative or remedial measures.”

OFAC also stressed the importance of “understanding and adhering” to the agency’s sectoral sanctions programs. "Sectoral sanctions are an important element of OFAC’s foreign policy and national security goals, and OFAC is committed to enforcing against these programs.”

State Street didn’t immediately respond to a request for comment.