Key US Legislative and Regulatory Initiatives

Key US Legislative and Regulatory Initiatives This section provides an overview of the principal elements of US laws related to money laundering and terrorism financing that affect international transactions and jurisdictions. USA PATRIOT Act Motivated by the terrorist attacks of September 11, 2001, and the urgent need to decipher and disable mechanisms that finance terrorism, the US Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) in October 2001 to strengthen money laundering laws and the Bank Secrecy Act (BSA) to levels unseen since the original passage of the BSA in 1970 and the Money Laundering Control Act of 1986 (Public Law 99-570), the world’s first law to criminalize money laundering. Title III of the USA PATRIOT Act (U.S. Public Law 107-56), “The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001,” contains most, although not all, of the AML-related provisions of this diverse law. The purpose of Title III is “increasing the strength of US measures to prevent, detect, and prosecute international money laundering and the financing of terrorism, to provide a national mandate for subjecting to special scrutiny foreign jurisdictions, financial organizations operating outside the United States, and classes of international transactions or types of accounts that pose particular opportunities for criminal abuse, and to ensure that all appropriate elements of the financial services industry are subject to appropriate requirements to report potential money laundering transactions to proper authorities.” As noted in its purpose, the USA PATRIOT Act has implications for US organizations and non-US organizations that do business in the U.S. It is important to note that the regulations issued under the USA PATRIOT Act by the US Department of the Treasury provide the detailed requirements that financial organizations must follow to comply with the provisions of the Act. These regulations are compiled in 31 Code of Federal Regulation Chapter X. Key provisions of the USA PATRIOT Act stem from the premise that international access points to the US financial system must be controlled. Thus, the law covers a wide range of AML/CFT provisions affecting foreign businesses. These include the following: Section 311: Special Measures for Primary Money Laundering Concerns (31 U.S.C. 5318A) This section provides the US Department of the Treasury with the authority to apply graduated, proportionate measures against a foreign jurisdiction, foreign financial organization, type of international transaction, and type of account that the Treasury Secretary determines to be a “primary money laundering concern.” By designating a country or financial organization as a primary money laundering concern, the US government can force US banks to halt many of their financial dealings with the designee. Once identified, the Treasury Department can require US financial organizations to follow any or all of the following five special measures: 1. Keep records and/or file reports on certain financial transactions, including a description of the transactions, the identities and addresses of the participants in the transactions, and the identities of the beneficial owners of the funds involved. 2. Obtain information on the beneficial ownership of any account opened or maintained in the United States by a foreign person or a foreign person’s representative. 3. Identify and obtain information about customers who are permitted to use, or whose transactions are routed through, a foreign bank’s payablethrough account. 4. Identify and obtain information about customers permitted to use, or whose transactions are routed through, a foreign bank’s correspondent account. 5. Close certain payable-through and correspondent accounts. To ensure that all relevant factors are considered, the Treasury Secretary must consult with the Secretary of State and the Attorney General before designating a jurisdiction, organization, or specific type of transaction or account as a primary money laundering concern. Section 311 actions are distinct from designations brought by Treasury’s Office of Foreign Assets Control (OFAC), which are applied more broadly and can also trigger asset freezing obligations. Section 312: Correspondent and Private Banking Accounts (31 U.S.C. 5318(i)) This section requires due diligence and, in certain situations, EDD for foreign correspondent accounts, which includes virtually all account relationships that organizations can have with a foreign financial organization, as well as private banking for non-US people. The correspondent banking portions of the rule apply to US banks, credit unions, thrift organizations, trust banks, broker-dealers, futures commission merchants and introducing brokers in commodities and mutual funds, and US-based agencies and branches of foreign banks. Foreign financial organizations covered by the rule include foreign banks, foreign branches of US banks, foreign businesses that would be considered broker-dealers, futures commission merchants, introducing brokers in commodities and mutual funds that operate in the United States, and money transmitters and currency exchangers organized in a foreign country. The due diligence program must be “appropriate, specific, and risk-based,” and, when necessary, include enhanced policies, procedures, and controls reasonably designed to identify and report suspected money laundering in a correspondent account maintained in the United States. This due diligence program must also be included in the organization’s AML program. The due diligence program must address three measures: 1. Determining whether enhanced due diligence is necessary 2. Assessing the money laundering risk presented by the correspondent account 3. Applying risk-based procedures and controls reasonably designed to detect and report suspected money laundering Pursuant to implementing the regulation, EDD procedures must be applied to a correspondent account established for a foreign bank operating under: • An offshore banking license • A license issued by a foreign country designated as noncooperative by an international organization, with which designation the Treasury Secretary agrees • A license issued by a foreign country that has been designated by the Treasury Secretary as warranting special measures pursuant to Section 311 of the USA PATRIOT Act The EDD that must be implemented in these situations includes: • Conducting enhanced scrutiny for possible money laundering and suspicious transactions, including: o Obtaining information relating to the foreign bank’s AML program o Monitoring transactions in and out of the correspondent account in a manner reasonably designed to detect possible money laundering and suspicious activity o • Obtaining information about the correspondent account that is being used as a payable-through account Determining whether the correspondent account is being used by other foreign banks that have a correspondent relationship with the foreign bank for which the correspondent account was established, and taking reasonable steps to assess and mitigate the money laundering risks associated with such accounts • Determining, for any such foreign bank whose shares are not publicly traded, the identity of each of the owners of the foreign bank with the power to vote 10 percent or more of any class of securities of the bank and the nature and extent of the ownership interest of each such owner The private banking portions of the rule apply to the same organizations covered by the correspondent banking provisions. Such organizations must maintain a due diligence program for private banking accounts and conduct enhanced scrutiny of private banking accounts maintained for senior foreign political figures, their immediate family members, and their close associates. Under the rule, a private banking account is defined as (a) an account with a minimum aggregate deposit of US$1 million, (b) an account for one or more non-US people, and (c) an account that is assigned to a bank employee acting as a liaison with the non-US person. For covered private banking accounts, US organizations must take reasonable steps to: • Ascertain the identity of all nominal and beneficial owners of the accounts • Ascertain whether any such owner is a senior foreign political figure • Ascertain the source of the funds in the account and the purpose and expected use of the account • Monitor the account to ensure its activity is consistent with the information provided regarding the source of funds and the purpose and expected use of the account, as needed, to guard against money laundering, and to report any suspected money laundering or suspicious activity In ascertaining whether an account owner is a senior foreign political figure, the organization must take reasonable steps to determine if the person is a “current or former senior official in the executive, legislative, administrative, military, or judicial branches of a foreign government.” The definition also covers officials of foreign political parties and government-owned commercial enterprises, as well as immediate family members and persons who are “widely and publicly known” to be close associates. An organization that maintains accounts for these individuals must conduct enhanced scrutiny that is reasonably designed to detect if the funds “may involve the proceeds of foreign corruption,” which includes any asset or property obtained “through misappropriation, theft, or embezzlement of public funds, the unlawful conversion of property of a foreign government, or … bribery or extortion.” Section 313: Prohibition on Correspondent Accounts for Foreign Shell Banks (31 U.S.C. 5318(j)) This section prohibits US banks and securities brokers and dealers from maintaining correspondent accounts for foreign, unregulated shell banks that have no physical presence. The term physical presence is defined as a place of business that is maintained by a foreign bank located at a fixed address (versus solely an electronic address) where it: • Is authorized to conduct banking activities • Employs one or more individuals on a full-time basis at that location • Maintains operating records at that location • Is subject to inspection by the banking authority which licensed it at that location The term shell bank does not include a bank that is a regulated affiliate of a bank that maintains a physical presence. The section also requires financial organizations to take reasonable steps to ensure that foreign banks with correspondent accounts do not themselves permit access to such accounts by foreign shell banks. Banks and securities brokers are permitted to use a certification form to comply with the rule. That process requires the foreign banks to certify at least once every three years that they are not themselves shell banks and that they do not permit shell banks access to the US correspondent account through a nested correspondent relationship. Sections 314(a) and 314(b): Help “law enforcement identify, disrupt, and prevent terrorist acts and money laundering activities by encouraging further cooperation among law enforcement, regulators, and financial institutions to share information regarding those suspected of being involved in terrorism or money laundering.” • Section 314(a): FinCEN’s regulations under Section 314(a) enable US federal, state, local, and foreign (European Union) law enforcement agencies, through FinCEN, to reach out to more than 43,000 points of contact at more than 22,000 financial organizations to locate accounts and transactions of persons who may be involved in terrorism or money laundering. To obtain documents from a financial organization that has reported a match of a subject, a law enforcement agency must meet the legal standards that apply to the specific investigative tool that it chooses to use to obtain the documents. • Section 314(b): 314(b) information sharing is a voluntary program. Entities that may participate in 314(b) include US financial organizations subject to an AML program requirement under FinCEN regulations, any association of such financial organizations, and unincorporated associations of financial organizations. This includes the following types of US financial organizations: o Banks, credit unions, and other depository institutions o Casinos and card clubs o Money services businesses o Brokers and dealers in securities o Mutual funds o Insurance companies o Futures commission merchants and introducing brokers in o Dealers in precious metals, precious stones, and jewels o Operators of credit card systems o Loan and finance companies o Government-sponsored enterprises commodities Section 314(b) allows these financial organizations to share information with one another regarding individuals, entities, organizations, and countries for purposes of identifying and, when appropriate, reporting activities that might involve possible terrorist activity or money laundering. Section 314(b) also allows for safe harbor liability protections to share information related to activities the financial organization suspects might involve money laundering or terrorist activity, even if the financial organization or association cannot identify specific proceeds of a specified unlawful activity being laundered or the activity does not constitute a “transaction.” Expanded details around Section 314(b) were included in a FinCEN Section 314(b) Fact Sheet issued in December 2020, which rescinded previous guidance and an administrative ruling. • Section 319(a): Forfeiture from US correspondent account (18 U.S.C. 981(k)). In situations in which funds have been deposited with a foreign bank, this section permits the US government to seize funds in the same amount from a correspondent bank account in the United States that has been opened and maintained for the foreign bank. The US government is not required to trace the funds, because they are deemed to have been deposited into the correspondent account. However, the owner of the funds may contest the seizure order. • Section 319(b): Records relating to correspondent accounts for foreign banks (31 U.S.C. 5318(k)). This section allows the appropriate federal banking agency to require a financial organization to produce within 120 hours (5 days) records or information related to the organization’s AML compliance or related to a customer of the organization or any account opened, maintained, administered, or managed in the United States by the financial organization. The section also allows the Treasury Secretary and the Attorney General to subpoena records of a foreign bank that maintains a correspondent account in the United States. The subpoena can request any records relating to the account, including records located outside the United States. If the foreign bank fails to comply with or fails to contest the subpoena, the Treasury Secretary or the Attorney General can order the US financial organization to close the correspondent account within 10 days of receipt of such an order. Additionally, the section requires foreign banks to designate a registered agent in the United States to accept service of subpoenas pursuant to this section. Furthermore, US banks and securities brokers and dealers who maintain correspondent accounts for foreign banks must keep records of the identity of the 25 percent owners of the foreign bank, unless it is publicly traded, as well as the name of the correspondent bank’s registered agent in the US. This information is generally collected on the certification form used to comply with Section 313 and must be updated at least every three years or more frequently, if the information is no longer correct. Anti-Money Laundering Act (AMLA) of 2020 The AMLA represents a notable development in the US AML regulatory structure first and foremost because it was the first AML-related law of substance (excluding the USA PATRIOT Act recertification) to be passed since the USA PATRIOT Act in 2001. The law’s infrastructure requires several key AML initiatives and more broadly shifts some regulatory priorities. One of the key distinctions between the USA PATRIOT Act and the AMLA is that the latter was passed as part of the National Defense Authorization Act (NDAA), which codifies the US budget and expenditures for the Department of Defense. This is notable because it is not directly promulgated by a US regulatory agency (e.g., OCC, FinCEN), and it creates a context for the language of the AMLA itself. In addition to enhancing US AML laws (e.g., the BSA), the AMLA shifts the focus of AML compliance from a regulatory perspective to national defense. The key priorities of the AMLA are to streamline AML/CFT systems, solidify by law a risk-based approach requirement to AML/CFT compliance programs. This includes “…the establishment by financial institutions of reasonably designed risk-based programs to combat money laundering and the financing of terrorism”; creates a reporting database with uniform beneficial ownership requirements; and increases FinCEN’s investigatory powers (e.g., ability to subpoena foreign bank records when those banks maintain US accounts); and requires enhanced cooperation and information sharing among financial institutions, regulators, and ultimately law enforcement-oriented agencies. The most critical language in these provisions is that, when new regulations under the AMLA are finalized, requirements should strike the proper balance between regulatory compliance and generating reporting from financial institutions (i.e., SARs and CTRs) to ensure a “high degree of usefulness to law enforcement.’’ One important omission is that the AMLA does not contain the words cannabis, marijuana, or hemp. Therefore, cannabis-related banking remains unclear. In contrast, Canada has implemented laws related to this emerging risk. Additional expansions under the AMLA for financial organizations include: • An expansion of civil monetary penalties to so-called “repeat” BSA violators • New criminal offenses, such as concealing the source of funds of a monetary instrument owned or held by a senior foreign political figure • Clawback provisions for remuneration and bonuses when the person who violated the BSA was a “partner, director, officer, or employee of a financial institution” at the time the violation of law occurred • Prohibitions of individuals convicted of BSA violations from sitting on the board of a financial institution • FinCEN’s authority to not only subpoena foreign financial institutions’ US account activity, but also foreign accounts • FinCEN’s authority to demand closure of correspondent accounts and impose daily fines for the failure to do so New requirements for the regulatory community include: • Require FinCEN to provide reports on how SARs and CTRs are used, and which key areas make them more “useful” to law enforcement • Encourage enhanced international cooperation between countries and their FIUs • Provide a report on how to streamline and reduce the burden for financial organizations to report “noncomplex” cases and matters such as structuring • Create a report with guidelines on how to derisk accounts and relationship in a safe, meaningful way that does not inhibit legitimate access to the global financial system • Report on more or less “approved” ways to enhance AML reporting through the utilization of more advanced technology • Publish information relating to emerging risks and trends in money laundering that can be utilized to develop and/or enhance screening typologies The Kleptocracy Asset Recovery Rewards Act Along with the AMLA, the NDAA also brings a legal requirement to expand the Kleptocracy Asset Recovery Rewards Act (KARRA). KARRA is effectively a whistleblower program for individuals who report on the proceeds of corruption moving through US financial organizations. This is notable because it aligns with international guidance and efforts by groups such as the FATF and the Wolfsberg Group to identify criminals in politics, as well as professional money launderers, who are referred to colloquially as “enablers.” Another key provision of the AMLA is the expansion of whistleblower protection for individuals who provide “original” information related to violations of AML laws to regulators and/or prosecutors, which follows international guidance regarding whistleblower programs. Beneficial ownership Acknowledging the number of media events (e.g., Panama Papers, Pandora Papers) in which limited liability corporations and other corporate structures were used nearly anonymously to move vast sums of money, the AMLA aims to create a central repository for all beneficial ownership information. The structure of the Corporate Transparency Act (CTA) registry is not yet clear, but the intention is to pierce the corporate veil of anonymity for two key reasons: 1) to create transparency within those structures to find and remove potential criminals hiding behind them; and 2) to create a database for use by state and federal law enforcement entities, aimed at mitigating national security risks. The CTA utilizes a number of exemptions; however, the CTA itself and the exemptions were drafted in response to FATF criticism that the US had not policed entities created in or owned by US parties. The CTA will ask business owners to provide, among other requirements: • A legal form of personal identification • Applications to form a corporate entity • Information on the registering agent Strategic priorities International money laundering has long been a concern and consideration for AML/CFT risk. This section of the AMLA matches international guidance concerning: • The screening of customers and business • Transaction value and volume to and from high-risk jurisdictions • Potentially high-risk third-party transactions from these jurisdictions The AMLA also calls for the establishment of the first AML/CFT strategic priorities, which should be announced within six months of the law’s passage. The strategic priorities align to FATF, the Wolfsberg Group, and other authorities’ guidance on how money is laundered, for what purpose, and who is moving the funds. From a national security perspective, the strategic priorities heavily reference cryptocurrency/VC and other modalities of money laundering. At a high level, the eight strategic priorities are: 1. Corruption: Noting that “corrupt actors and their financial facilitators may seek to take advantage of vulnerabilities in the US financial system to launder their assets and obscure the proceeds of crime,” this objective echoes the Wolfsberg Group recommendations and guidance on the methods and means used by corrupt political figures and their enablers to launder the proceeds of corruption. 2. Cybercrime and relevant cybersecurity and virtual currency considerations: This strategic priority centers on cybercrime (i.e., “any illegal activity that involves a computer, another digital device, or a computer network”), but it draws parallels to traditional cybercrime (e.g., wire fraud and account takeover) and emerging cybercrime (e.g., ransomware, in which the crime takes place on a computer/system, but that system’s data/information is not the actual target of the crime). This priority focuses on the misuse of cryptocurrency as a means to extort and move the proceeds of all forms of cybercrime. 3. Foreign and domestic terrorist financing: Consistent with FATF guidance and advisories issued by FINTRAC in Canada, this priority focuses on the misuse of the financial system for both global and domestic terrorism. It is significant that domestic terrorism is included from an AML/CFT perspective, and this strategic priority correlates the similarities between domestic and international terrorist activity. It also references the distinctions and similarities between terrorist activity (i.e., the attack itself) and terrorist support (e.g., expenses for travel, housing, food, etc., prior to the activity itself). 4. Fraud: Acknowledging that crimes such as fraud “generate the bulk of illicit proceeds in the United States,” this priority lists “bank, consumer, health care, securities and investment, and tax fraud” as the major sources of illicit activity within the US. There are parallels to the CTA, in that fraudulent incorporated entities are frequently utilized to launder the proceeds of fraud, although not as frequently as crimes such as tax fraud and tax evasion. This priority also draws a correlation to the “cybercrime” priority, outlining the utilization of bank and wire fraud to access accounts that are then be used to move the proceeds of cybercrime (e.g., business email compromise schemes). 5. Transnational criminal organization activity: Again, as a national security priority rather than simply regulatory compliance, this strategic priority uses the term “crime-terror nexus” to denote the enablement of money laundering for terrorist financing and the use of underlying crimes to raise money for terrorism. Drawing on references from the other strategic priorities, this priority specifically notes that organized crime groups might engage in or launder the proceeds of criminal activities and “maligned” activities, including “foreign election interference, attempts to stoke social unrest, and other profit-driven criminal acts” to gain the favor of individuals in seats of political power across the globe. 6. Drug trafficking organization activity: This strategic priority builds on international guidance concerning the use of the global financial system to place, layer, and integrate the proceeds of drug trafficking activities. It further notes that the US financial system might be used as a financial “transit” point for those proceeds, as well as their final holding place after laundering overseas. This priority also references both domestic and internationally linked sales of fentanyl and related components. 7. Human trafficking and human smuggling: This priority reflects the ongoing crime-terror nexus and notes that the victims of human trafficking might be used to launder money originating from the very crime by which they are being victimized. Like terrorist financing, this priority notes that often more “benign” appearing expenses, such as lodging, travel, and food, can be indicators of potential human trafficking. 8. Proliferation financing: Also from the national security perspective, this priority outlines both geographic and transactional risk (e.g., dual-use goods). It notes that often “gatekeepers, front or shell companies, exchange houses, or the illicit exploitation of international trade” are central to the laundering and movement of funds related to proliferation. The Reach of the US Criminal Money Laundering and Civil Forfeiture Laws The Money Laundering Control Act of 1986, the first criminal money laundering law of the United States, is a powerful legal weapon that may be used if the property involved in the financial transaction at issue represents the proceeds of at least one designated underlying crime—a “specified unlawful activity” (SUA). SUAs include virtually every US crime that produces economic advantage, including aircraft piracy, wire fraud, bank fraud, copyright infringement, embezzlement, export violations, illegal gambling, narcotics offenses, racketeering, and even some environmental crimes (18 USC 1956 and 1957). This money laundering law also applies to foreign individuals and foreign financial organizations if the financial transaction occurs in whole or in part in the United States or if the foreign financial organization maintains a bank account at a US financial organization. Although the prosecution must prove the existence of the proceeds of an SUA, it does not need to prove that the accused knew the exact source of the funds. The prosecution must prove only that the defendant knew that the funds came “from some form … of activity that constitutes a felony under state, federal, or foreign law, regardless of whether or not such activity” is an SUA (18 USC 1956(c)(1)). Courts have often ruled that willful blindness, which has been defined as “the deliberate avoidance of knowledge of the facts,” is the equivalent of actual knowledge. Willful blindness can be proven by the circumstances surrounding the transaction and the defendant’s conduct. Section 319(a) of the USA PATRIOT Act, discussed above, greatly strengthened the forfeiture powers over the funds of foreign persons and organizations. If the funds the United States pursues are deposited in a foreign bank that keeps an interbank account at a US bank, the United States may bring a case to forfeit the crime-tainted funds in the US account. US criminal money laundering and civil forfeiture laws (Case example) On August 5, 2021, the US Department of Justice (DOJ) announced that more than US$1.2 billion in funds misappropriated from the 1Malaysia Development Berhad (1MBD) investment fund had been returned to the people of Malaysia. From 2009 to 2015, over US$4.5 billion in funds from 1MBD was embezzled and laundered to purchase luxury real estate, fine art, hotels, fund a movie production, and pay bribes. The US District Courts in California and the District of Columbia led efforts to seize over US$1.7 billion in stolen assets. The case exemplified the fact that all transactions that involve the US financial system are subject to US laws. Therefore, the US government can file a forfeiture complaint based on an allegation that money or property was involved in or represents the proceeds of crime. The 1MDB investment fund was created by the government of Malaysia to promote economic development in the country through global partnerships and foreign direct investment. However, high-level 1MDB officials and their associates embezzled and laundered funds through the US, Switzerland, Singapore, and Luxemburg. To file a civil forfeiture complaint, the US government must be able to identify the property to be seized. The US government worked with international partners to assist with tracing the use of the proceeds of the criminally derived funds. It determined that funds were used in the US to purchase luxury homes in Beverly Hills and New York and to invest in a boutique hotel in Beverly Hills and the Park Lane Hotel in Manhattan. Funds were also used to purchase luxury real estate in London, a 300-foot superyacht, and fine art by the artists Monet and Van Gogh. Using fraudulent documents and representations, the co-conspirators laundered the funds through a series of complex transactions and shell companies with bank accounts located in the US and abroad. These transactions concealed the origin, source, and ownership of the funds, and ultimately passed through US financial institutions to then be used to acquire and invest in assets located in the US and overseas. The Federal Bureau of Investigation (FBI) and the Internal Revenue Service’s (IRS’s) Criminal Investigation agency led the investigation into the misappropriated funds. Beginning in 2016, US courts and the DOJ’s Money Laundering and Asset Forfeiture Section filed 41 civil forfeiture actions and seized over US$1.7 billion in stolen assets. The US DOJ received significant assistance from international government agencies and law enforcement from Malaysia, Singapore, and Luxembourg. These actions represent the largest civil forfeiture action ever initiated by the US DOJ to date. Key takeaways • All transactions that touch the US financial system are subject to US laws. • The US government can file a forfeiture complaint based on an allegation that the money or property was involved in or represents the proceeds of crime. • The US government must be able to identify the property to be seized to file a civil forfeiture complaint. • The US government works with international partners to assist with tracing the use of proceeds of criminally derived funds; this cooperation is essential for fighting financial crime. Office of Foreign Assets Control In addition to these laws and regulations, financial organizations and businesses in other countries must recognize the extraterritorial reach of regulations enforced by the US Department of the Treasury Office of Foreign Assets Control (OFAC). OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and criminals engaged in activities related to the proliferation of WMD. OFAC acts under presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction. Many of its sanctions are based on United Nations and other international mandates that are multilateral in scope and involve close cooperation with allied governments. OFAC sanction programs prohibit transactions and require the blocking of assets of persons and organizations that appear on one of several lists that OFAC issues periodically. The OFAC sanctions lists primarily include: • Country-based sanctions: Sanctions brought against entire countries that prohibit nearly all types of transactions (e.g., North Korea, Iran, Cuba) • List-based sanctions: Examples include the Specially Designated Nationals and Blocked Persons (SDN) list, Consolidated Sanctions list, and Foreign Sanctions Evader list, among others • Secondary sanctions: sanctions directed at non-US, non-sanctioned, parties for transactions and other specific dealings with parties subject to OFAC sanctions (e.g., Iranian and Russian businesses and sectors) • Sectoral sanctions: Known as “surgical or smart” sanctions in that they are applied against very focused targets to reduce subsequent collateral economic damage; for example, instead of sanctioning an entire country, sectoral sanctions target a specific sector such as energy, finance, or defense All US people must comply with OFAC regulations, including all US citizens and permanent resident aliens, regardless of where they are located; all people and entities within the United States; and all US-incorporated entities and their foreign branches. In the case of specific programs, such as those regarding North Korea, Syria, and Cuba, all foreign subsidiaries owned and controlled by companies also must comply. Certain programs also require foreign persons in possession of US-origin goods to comply. OFAC recognizes that complying with sanctions can be difficult and might take time for some US parties that are newly sanctioned or currently engaging in countries, and the sanctions might adversely impact humanitarian assistance and related trade. As such, OFAC requires a license authorization to engage in a transaction that otherwise would be prohibited. There are two types of licenses: general licenses and specific licenses. A general license authorizes a particular type of transaction for a class of persons without the need to apply for a license. A specific license is a written document issued by OFAC to a specific person or entity, authorizing a specific transaction in response to a written license application. OFAC also has the power to impose significant penalties on individuals and entities that are found to be in violation of the blocking orders within each of the sanction programs. Office of Foreign Assets Control (Case example: US sanctions) In 2014, OFAC reached a record US$963 million settlement with BNP Paribas SA (BNPP), Paris, France, following a US$8.9 billion penalty imposed for apparent violations of US sanctions regulations. The settlement resolved OFAC’s investigation into BNPP’s systemic practice of concealing, removing, omitting, and obscuring references to information about US-sanctioned parties in almost 4,000 financial transactions routed to or through US banks between 2005 and 2012. This was in apparent violation of US sanctions involving Sudan, Iran, Cuba and Burma. BNPP’s methods for processing sanctions-related payments to or through the US included removing references to sanctioned parties, replacing sanctioned parties with BNPP’s name or a code word, or otherwise structuring the payments in a manner that did not identify the involvement of the sanctioned parties in the transactions. Key takeaways • Regulated firms should have robust controls, including independent quality control and assurance, in place to detect “stripping” (i.e., the deliberate removal of key payment-related information), a common sanctions evasion technique. • Non-US banks can be fined for noncompliance with OFAC sanctions if their transactions have a US connection, such as passing through a US bank. • Fines and penalties associated with sanctions noncompliance can be significant and damaging to a regulated business.