Recent Trends in Sanctions and AML Regulation and Enforcement

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Enforcement

The last few years have seen a number of significant regulatory developments and enforcement trends with respect to economic sanctions and anti-money laundering laws. The next year will likely bring further regulatory changes to these legal regimes, as well new enforcement patterns, writes Michael Casey of Ropes & Gray’s government enforcement practice.

Michael Casey

By Michael Casey

Michael Casey is counsel in Ropes & Gray’s government enforcement practice in Washington. Mike focuses his practice on representing clients in investigations, transactions, and regulatory matters related to economic sanctions, export controls, money laundering, international corruption, customs, and the CFIUS review process.

I. Introduction

Sanctions and money laundering have both been in the news lately, but for very different reasons. At the same time that the U.S. government has relaxed its most prominent sanctions programs, it has issued a series of new anti-money laundering (“AML”) regulations and stepped up enforcement of AML laws as well. This article will explore these trends and offer predictions about the future of economic sanctions and anti-money laundering laws.

II. U.S. Sanctions

A. Relaxation of Sanctions. The Obama administration has recently scaled back a number of U.S. sanctions programs, most notably the Iranian and Cuban sanctions. In January 2016, the United States provided sanctions relief to Iran in accordance with its obligations under the Joint Comprehensive Plan of Action. These changes have created new opportunities for U.S. companies, as well as foreign entities owned or controlled by U.S. companies, to engage in commercial dealings with Iran. Similarly, the Obama administration significantly relaxed the Cuban sanctions over the last two years. Starting in December 2014, President Obama has announced policy changes with respect to Cuba that allow U.S. citizens to travel to Cuba for many purposes and U.S.-based companies to do some types of business with and in Cuba.

While the changes to the Iranian and Cuban sanctions have garnered the most publicity, the Obama administration has also ended other sanctions programs. After the Office of Foreign Assets Control (“OFAC”) relaxed the Burmese sanctions during the last four years through a series of general licenses, President Obama recently terminated this sanctions program altogether. OFAC also recently ended its long-standing sanctions program directed at certain individuals in the Ivory Coast.

These substantive changes to the OFAC sanctions programs have been driven by the Obama administration's foreign policy objectives. When a new president takes over in January, he or she will likely modify the U.S. sanctions regime to reflect his or her worldview and foreign policy goals.

B. Potential Decrease in Sanctions Enforcement. Another trend has been the rise—and the potential fall—in sanctions enforcement. Between 2008 and 2015, there was a dramatic increase in sanctions enforcement. The U.S. government entered into a series of huge settlements with multinational financial institutions and, to a lesser extent, companies operating in the oil and gas industry, for violating U.S. sanctions. In total, 13 companies each agreed to pay more than $200 million to resolve allegations they had violated U.S. sanctions. In the largest of these matters, BNP Paribas paid just under $9 billion and pled guilty to violating federal and New York state law, for its dealings with customers in Sudan and other embargoed countries.

But there have been fewer sanctions enforcement actions in the last 12 months. The Department of Justice has not announced a major corporate sanctions case this year, and OFAC, which has responsibility for bringing civil enforcement actions against sanctions violators, has been quiet as well. OFAC has collected just over $15.6 million so far this year. During the first ten months of 2014 and 2015, OFAC had collected over $1.2 billion and nearly $600 million, respectively.

This recent slowdown could be nothing more than a temporary pause in sanctions enforcement. Enforcement actions are not always resolved at regular intervals; it is entirely possible that the U.S. government is investigating a number of significant cases that will be settled soon. There has also been a great deal of personnel turnover at OFAC in the last eighteen months, especially within the highest levels of the agency's Enforcement Division. After the vacant leadership positions are filled, OFAC might resume bringing and settling significant sanctions matters.

But it is also possible that one era in sanctions enforcement has ended. The government has been very aggressive in pursuing big sanctions cases against financial institutions and oil and gas companies, and may not have any more cases targeting those types of entities remaining in its pipeline. If that is the case, the government may shift its focus to different industrial sectors in coming years.

III. Anti-Money Laundering Laws

As described above, the recent trends with economic sanctions have been less regulation and fewer enforcement actions. Things have moved in the opposite direction with money laundering; the government has issued more regulations and brought a greater number of enforcement actions.

A. More Regulation. In the last 14 months, the Financial Crimes Enforcement Network (“FinCEN”) has issued two significant final regulations, as well as a proposed rule, designed to prevent money laundering from occurring in the United States. These regulations have imposed—or will impose—new affirmative compliance obligations on a wide range of U.S. entities.

Earlier this year, FinCEN issued Geographic Targeting Orders (“GTOs”) that apply when legal entities make cash purchases of high-end residential real estate in certain geographic areas. For covered transactions, title companies are required to report information about the beneficial owners of the legal entity, as well as about the individual representing the legal entity in the purchase. The GTOs initially applied only to cash purchases above certain monetary thresholds in Manhattan and Miami-Dade County, but FinCEN subsequently expanded them to apply to all five boroughs of New York, as well as the greater Miami and San Francisco regions, Los Angeles County, and San Diego County.

This spring, FinCEN published a final rule that will require banks, broker-dealers, and mutual funds to obtain beneficial ownership and control person information for certain types of legal entity customers. In addition, the rule requires covered financial institutions to include ongoing customer due diligence as part of their AML program pursuant to the Bank Secrecy Act regime.

FinCEN also published a proposed rule in August 2015 that would make registered investment advisers “financial institutions” for Bank Secrecy Act purposes for the first time. This rule, if finalized, would impose a number of new affirmative compliance obligations on registered investment advisers, including (1) establishing AML compliance programs; (2) filing suspicious activity reports, and (3) complying with other reporting and information sharing requirements.

The government is likely to issue new proposed rules and finalize pending regulations related to money laundering in the future. For example, FinCEN's proposed rule deeming registered investment advisers to be “financial institutions” is expected to be finalized within the next six months. FinCEN issued a similar proposed rule in 2003, but then withdrew it in 2008. By issuing the new proposed rule in 2015, FinCEN appears to have committed to finalizing the rule this time around.

B. Heightened Enforcement. In the past five years, the U.S. government has also brought a series of high-profile cases against financial institutions. In 2012, HSBC paid nearly $2 billion for its role in assisting Latin American drug cartels launder money through the U.S. financial system. Two years later, JPMorgan agreed to pay approximately $1.7 billion to resolve allegations it had violated anti-money laundering laws in connection with its role in Bernie Madoff's investment scheme. This summer the DOJ filed civil forfeiture complaints seeking to recover more than $1 billion in funds that were purportedly misappropriated from a Malaysian sovereign wealth fund and subsequently laundered. The U.S. is not the only government that has shown an increased interest in bringing major AML enforcement actions. Late last year, Barclays entered into a $100 million settlement with the U.K.'s Financial Conduct Authority for violating applicable AML laws by failing to conduct sufficient due diligence on its high-risk customers.

While enforcement actions against financial institutions have received the most publicity, regulators have brought a number of cases against individuals as well. The AML compliance officers at Brown Brothers Harriman, Raymond James & Associates, and Gibraltar Private Bank and Trust Company have all recently been fined by regulators for failing to establish and maintain sufficient AML programs. The U.S. Attorney's Office in Manhattan filed a civil complaint in December 2014 against the former chief compliance officer of MoneyGram International Inc. that seeks to hold him personally liable for the company's failure to maintain an effective AML compliance program and file mandatory suspicious activity reports. In this case, the government seeks $1M in civil penalties, as well as an injunction prohibiting the former chief compliance officer from working at a regulated financial institution for a period of time. This case is still pending, but has the potential to be a landmark decision.

The U.S. government appears likely to continue to prioritize AML enforcement. The DOJ has devoted significant resources to its Asset Forfeiture and Money Laundering Section, and it has also created a specialized FBI unit focused on investigating money laundering and international corruption. Within the Treasury Department, FinCEN established a stand-alone enforcement division in 2013 that is authorized to bring civil actions against regulated financial institutions.

IV. Conclusion

The last few years have seen a number of significant regulatory developments and enforcement trends with respect to economic sanctions and anti-money laundering laws. The next year will likely bring further regulatory changes to these legal regimes, as well new enforcement patterns.

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