OFAC Issues Secondary Sanctions for Foreign Banks Doing Business with Hizballah
On April 14, 2016, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued new secondary sanctions (found in 31 C.F.R. 566 (pdf)) to implement the Hizballah International Financing Prevention Act of 2015.
The new secondary sanctions target foreign financial institutions that provide services to Hizballah. More specifically, the sanctions target foreign financial institutions that knowingly facilitate transactions or provide financial services in connection to transactions for Hizballah or its agents. § 566.201(a).
Let’s unpack what that means. The regulations may seem vague at a glance, but OFAC takes great care to define the terms in its regulations.
Financial Institutions
Firstly, the term “financial institution” is defined broadly, including: banks, credit unions, SEC-registered brokers and other securities brokers, currency exchanges, issuers of travelers’ and cashiers’ checks, insurance companies, dealers in precious metals and gems, companies that transfer money, and even companies that engage in the sale of boats, cars, and airplanes. § 566.306.
This is another reminder that although the United States lifted the nuclear-related secondary sanctions on Implementation Day (January 16, 2016), the U.S. will continue to use economic sanctions as a deterrent to terrorism, human rights abuses, and ballistic missile testing by Iran and its allies.
These recent sanctions demonstrate, in particular, that the U.S. is willing to level secondary sanctions on foreign banks, insurance companies, and lenders who knowingly do business with individuals on the SDN List.
Knowingly
Secondly, the “knowingly” requirement is significant. Unlike the broad primary sanctions in the Iranian Transactions and Sanctions Regulations (ITSR), the new prohibitions in 31 C.F.R. § 566 only extend to financial institutions that knowingly facilitate a transaction for Hizballah.
Knowingly is defined as having actual knowledge of, or having reason to know, of the conduct, circumstances, or result. § 566.312. The “reason to know” prong is the real kicker, as OFAC has very high expectations regarding what constitutes reasonable compliance measures for financial institutions.
Over the years, OFAC has raised these expectations and used enforcement actions to teach financial institutions what information reasonable compliance programs should be able to catch. As such, the “knowingly” requirement can still be met where the financial institution was unaware of a Hizballah connection because of a failure of employees to follow compliance procedures or because the compliance procedures were outdated and insufficient.
Even with the broad reach of the term “knowingly,” this standard is in stark contrast to the strict liability offenses that apply to U.S. persons. Under a strict liability regime, a person is guilty of an offense even if they did not knowingly commit an act. For instance, a U.S. company would be violating U.S. sanctions if it did business with an individual on the SDN List even if it did know the person was on the SDN List.
The knowingly standard does not come as a surprise in these regulations. In fact, it is common practice for the U.S. to abandon the strict liability regime in the context of secondary sanctions against foreign companies and financial institutions. Since secondary sanctions are imposed against actors in third countries, many of which are allies of the United States, it makes sense diplomatically to have an elevated mens rea requirement.
Facilitation
Thirdly, the sanctions do not just target banks who transact directly with Hizballah or Hizballah-related SDN persons. Rather, the sanctions target any foreign financial institution that even “facilitates” such a transaction. And, if there is one important thing to understand about sanctions, it is that OFAC defines the term “facilitate” very, very broadly.
True to form, OFAC’s definition of “facilitating a transaction” in the context of these sanctions under § 566.403 also includes “the provision of assistance by a foreign financial institution for those efforts, activities, or transactions, including the provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.” § 566.403 (emphasis added).
Accordingly, any knowing involvement by a foreign financial institution in a Hizballah-related transaction would likely trigger these sanctions.
Consequences of Violating § 566.201
So what happens if a foreign financial institution is found to have knowingly facilitated a Hizballah-related transaction? In such an event, the Secretary of the Treasury has the discretion to impose one or more strict conditions that cut off the foreign financial institution from the U.S. financial system, albeit to different extents. § 566.201(b).
More specifically, the Secretary of the Treasury can go so far as prohibiting U.S. financial institutions from having correspondent accounts or payable-through accounts with the foreign financial institution. § 560.201(c). In less severe cases, the Secretary can restrict the use of such accounts to specific transactions like personal remittances, or place limits on the monetary amount or number of transactions through such accounts.
The Secretary also has the option of increasing the transactional costs of using such accounts by requiring the foreign financial institution to obtain pre-approval from the U.S. financial institution for each transaction.
When these restrictions are imposed, the name of the foreign financial institution as well as the terms of the restriction will be published on the Hizballah Financial Sanctions Regulations List (HFSR List) on OFAC’s website and in the Federal Register. This may also have the additional consequence of making other financial institutions wary of doing business with the listed bank or lender.
What Does This Mean for Foreign Financial Institutions?
Before these sanctions regulations went into effect, Hizballah was already designated as a terrorist group on the SDN List, as were many Hizballah leaders and agents. However, on April 14, 2016 the secondary sanctions attached to approximately 100 SDN persons who are linked to Hizballah.
Now, providing any services in connection to a Hizballah-related transaction could result in a foreign bank being cut off from the U.S. financial system.
The “reason to know” language also suggests that foreign financial institutions should make sure that their compliance programs and software are up to date, and that their employees are properly trained on the procedures. The § 566 secondary sanctions may not be strict liability offenses, but foreign financial institutions will be expected to have policies and procedures to screen SDN persons in transactions.
Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes. Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.
