OFAC Enforcement Update: Regulations Show Value of Internal Controls and Disclosure | PLC Bass, Berry & Sims

On December 23, 2021, the United States Department of Treasury’s Office of Foreign Assets Control (OFAC) and TD Bank, NA (TD) entered into an agreement to resolve TD’s violations of the Korea Sanctions Regulations North and the Foreign Narcotics Sanctions Regulations. On January 12, OFAC and Sojitz Hong Kong (Sojitz HK) reached a settlement agreement regarding Sojitz’s violations of Iran’s Transactions and Sanctions Regulations (ITSR). These two resolutions, passed just weeks apart, serve as a reminder of OFAC’s broad mandate to administer and enforce US sanctions regulations.

TD Bank violated North Korea and narcotics sanctions

The United States maintains comprehensive sanctions against North Korea, and most transactions with the country and nationals of the country, wherever located, are prohibited without a license. Although a license authorizes banks in the United States to conduct certain transactions with the North Korean Mission to the United Nations, this license does not extend to maintaining accounts for employees of the North Korean Mission.

According to OFAC, TD processed 1,479 transactions and maintained nine accounts on behalf of five North Korean mission employees without an OFAC license. OFAC noted that TD sanctions screening did not detect individual North Korean government employees. OFAC also noted that TD employees apparently misclassified North Korean mission personnel when processing passports by filling in the South Korean country code or leaving the citizenship identification field blank. .

OFAC also penalized TD for holding accounts for a Specially Designated National Narcotics Hub (SDN) for four years. (As is the case with North Korea, virtually all transactions with an SDN are prohibited.)

According to OFAC, TD received multiple sanctions screening alerts for this SDN during the relevant period. TD apparently ignored the first four alerts because there was no match on SDN’s full name, date of birth, and geographic location. The fifth alert, generated in February 2020, was accepted, at which time the SDN accounts were closed.

TD agreed to settle the case with OFAC by paying a civil penalty of over $115,000. OFAC significantly reduced the amount of the fine largely because TD voluntarily disclosed the violations to OFAC and then cooperated with the agency in its review of the case.

Sojitz HK violated US sanctions against Iran

OFAC’s settlement with Sojitz HK, with the company agreeing to pay more than $5.2 million, involved violations of ITSR when Sojitz HK made US dollar payments for high-density polyethylene resin of Iranian descent. Sojitz Corporation, the parent company of Sojitz HK, is based in Japan.

According to OFAC, Sojitz HK ultimately made 60 payments through the US banking system to cover purchases of Iranian-origin resin from a supplier in Thailand. The payments were made by company employees, although those employees were told they could not make payments in US dollars in connection with any activity involving Iran. According to OFAC, these employees intentionally circumvented the instructions.

Given the number of transactions involved and the amount (over $75 million) of payments made to the Thai supplier, the maximum legal penalty that could have been imposed on Sojitz HK was over $150 million. OFAC pointed out that the very significant reduction in the sentence was the result of several factors, including the fact that the company voluntarily disclosed the violations and cooperated with the agency’s review of the matter. Additionally, OFAC noted that the company has agreed to improve its compliance processes. Additionally, the company terminated the employees involved in the violations.

Importance of appropriate response to breaches, improving compliance

These issues underscore the importance of implementing appropriate sanction screening controls, including back-up protection. This can help a company identify and prevent a sanctions violation despite missed red flags.

These topics also underscore the importance of training staff on their sanctioning obligations and the corresponding company processes to meet these obligations. This makes breaches less likely and, more importantly, helps protect the business in the event of a breach. OFAC specifically mentioned, as a mitigating factor in the Sojitz HK resolution, that the company had been explicit with staff about not making US dollar payments for any transactions involving Iran.

Finally, both resolutions demonstrate that voluntary disclosure to OFAC can result in significant penalty reductions. The decision to disclose is an important one and should be made carefully. Once a disclosure is made, maximum transparency and cooperation with the government is required. It is therefore not a decision that a company should take lightly. But the benefits that TD and Sojitz HK have gained from the disclosure are clear.

* Thanks to legal assistant Ustina Ibrahim for her work on this article.

James V. Hayes