Barclays Bank Pays Millions to Settle Sanctions Violations Involving Shadow Blocked Entities
On February 8, 2016, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement between the agency and Barclays Bank Plc regarding apparent violations of the Zimbabwe Sanctions Regulations (ZSR).
Specifically, Barclays (including its New York branch), processed 159 transactions totaling approximately $3,375,617 for or on behalf of corporate customers that were owned 50 percent or more, directly or indirectly, by a person identified on the List of Specially Designated Nationals and Blocked Persons (SDN List). Barclays agreed to pay $2,485,890 to settle its potential civil liability.
OFAC’s enforcement action draws attention to the risk posed to financial institutions and other US persons by “shadow” blocked entities. Shadow blocked entities are those entities that are at least 50% owned, individually or in the aggregate, directly or indirectly, by persons identified on the SDN List. OFAC has published guidance on this issue fully describing the obligations of US persons when confronted by entities that are 50% owned by a person appearing on the SDN List.
OFAC’s guidance is clear: US persons are prohibited from engaging in any transactions involving shadow blocked entities even though such entities do not appear on the SDN List, hence the term “shadow” blocked entities. US persons are also required to block all property in their possession associated with such entities.
In essence, US persons must treat shadow blocked entities as if though they appear on the SDN List even though they do not. Given that sanctions violations are strict liability offenses, screening for such shadow blocked entities becomes very important for sanctions compliance purposes.
In the instant enforcement action, OFAC treated as a mitigating factor the fact that the prohibited entities were not publicly identified or designated and included on the SDN List at the time that Barclays processed the suspect transactions. Although this mitigating treatment is both fair and welcomed, it did not absolve Barclays of its obligations to comply with sanctions, including OFAC’s interpretation of its sanctions regulations. OFAC still concluded that Barclays violated the ZSR.
This enforcement action can be taken as a lesson and example for others. Sophisticated financial institutions and other US persons engaged in trade should actively undertake measures to know and identify the ultimate beneficial owners of the corporations they deal with. US persons should also utilize publicly available information to determine such identifying information if the corporation or local laws undermine or degrade such efforts.
US persons should also be constantly evaluating their sanctions compliance programs in order to identify weaknesses and vulnerabilities. Long-term and ongoing violations are more likely to undermine the effectiveness of a sanctions program, which is often identified as an aggravating factor in enforcement actions. For example, OFAC determined that Barclays provided SDNs with indirect access to the US financial system for five years, causing harm to the Zimbabwe sanctions program and its associated policy objectives. The risk of suffering ongoing and long-term violations is heightened when dealing with shadow blocked entities, as such entities are not publicly identified as blocked or sanctioned. US persons should continue to exercise extreme caution when dealing with economies or countries with high numbers of blocked persons.
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 US foreign policy and national security objectives evolve.