“Old MacDonald” of Sanctions Compliance and Customer Due Diligence

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“Old MacDonald” of Sanctions Compliance and Customer Due Diligence

If you are keeping score, it seems that Sanctions Compliance is a bit like the old nursery rhyme Old MacDonald Had a Farm. You know “…here a sanction, there a sanction, everywhere a sanction, sanction…”

Most of our readers should be well aware of economic sanctions programs in place by the US Government. These are designed to penalize bad actors who are affiliated with rogue political regimes or with other individuals or organizations that are involved in all sorts of nefarious endeavors, including but not limited to narcotics cartels, terrorist organizations or the proliferation of weapons of mass destruction. Most of these sanctions are administered by the US Treasury’s Office of Foreign Assets Control (OFAC). [And we have not even touched the black hole in the compliance universe represented by export control regulations!)

Through record penalties and aggressive enforcement over the past several years, the US Government has long sought to choke off funding to regimes and organizations that represent a threat to US interests, including Iran, Cuba and Syria, via enforcement of US sanctions programs.

Through recent major regulatory actions against global financial institutions including HSBC, Standard Chartered Bank and ING for violations of sanctions laws and money laundering laws, such sanctions laws have garnered considerable attention over the past several years. Civil money penalties assessed against these three institutions ranged between US$619M-$1.92B each – certainly attention getters.

Sanctions Compliance is not for the faint of heart. While OFAC Sanctions continue to grab headlines and advances, the US Government’s foreign policy agenda with well-publicized enforcement actions, other countries and regulatory bodies, including the UK, EU and UN along with more than 60 other countries, have some sort of sanctions programs in place. This, to say the least, makes sanctions compliance a much greater challenge for both corporate and financial organizations (compliance officers who read this are all too familiar with the angst that such compliance processes present)

And, while corporations and institutions are contending with the ever-changing sanctions regimes both at home and abroad, and the increasingly “creative” tactics that countries like, Iran are employing to evade sanctions, the advent of US state-level sanction sanctions programs add even more complexity to the process; and may well increase your risks of gastric reflux disease.

A growing number of US state governments have, with much less fanfare than their federal brethren, implemented foreign policies of their own. US state-based sanction/prohibition laws; thereby adding yet another layer of intricacy to the already complicated and treacherous landscape of global sanctions compliance

In recent years, Congress has enacted legislation authorizing states to prohibit investments in, or divest assets from, Sudan and Iran. The Sudan Accountability and Divestment Act of 2007 authorizes states and local governments to adopt divestment or investment prohibition measures involving (1) persons within the state or local government determines are conducting business operations in the Sudanese energy and military equipment sectors or (2) persons having a direct investment in or carrying on a trade or business with Sudanese entities or the Government of Sudan, provided certain notification requirements are met.

The Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) which was enacted in 2010, includes provisions authorizing state and local governments to divest from those businesses making investments of $20 million or more in Iran’s energy sector after adequate investigation and notification have occurred. Both laws provide that a measure falling within the scope of the authorization is not preempted by any federal law or regulation.

So far, more than two dozen states have enacted their own sanctions laws, which are often labeled as “divestment sanctions” because they are aimed at prohibiting state procurement and investment with companies doing business with certain countries or other entities that are under the scrutiny of sanctions by the US government.

Increasingly states are fining parties for doing business with companies who, in turn are doing business with sanctioned countries. With the addition of such state-level laws, overall sanctions compliance can be more difficult than solving the Rubik’s cube riddle while being blindfolded.

Additionally, state “scrutinized company” lists and how they are assembled appears to be a contentious topic as well. Such state lists often diverge from OFAC’s List of Specially Designated List of Sanctioned Entities and Blocked Persons. Business associations have argued that state agencies lack the time, funding and expertise to properly and accurately compile and maintain information on companies with business ties to sanctioned countries. Without the resources and the interagency ties that OFAC has access to, states must rely, in fair measure, upon open-source information obtained from news and media outlets, advocacy groups or other sources.

This leaves financial institutions and other corporations to screen against an ever-growing number of sanctions lists, adding yet another compliance headache to a field with no shortage of them. More information on state sanctions programs is available from the various state governments themselves, as well as http://www.fas.org/sgp/crs/misc/RL33948.pdf.

If you need assistance navigating the murky waters of sanctions compliance, or if you would like an independent review of your program to insure that it is functioning at an optimum level, we encourage you to contact us and we will put you in touch with resources that can help.

Of course, grabbing an antacid is probably a good suggestion also…

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