The Long Arm of the Law

Eric A. Sohn at Dow Jones Risk & Compliance discusses the US’ ability to restrict a firm’s access to correspondent banking services and its financial markets.

In most nations, laws and regulations are binding only on parties and activities emanating from within the country’s borders. Typically, that includes citizens wherever they are at the moment, all foreign nationals when they are within the country’s borders, all operations of domestically-organised companies, and domestically-located operations of foreign companies. However, to assume that this is the case globally would be unwise, as a number of recent cases have demonstrated.

It is useful to start with a basic tenet of international commerce: access to markets is a privilege, not a right. Countries erect barriers to free, unfettered trade of multiple kinds, from tariffs to local requirements for technology transfers and adherence to new regulations like GDPR to restrictions, penalties and prohibitions for prior bad acts that impacted the issuing nation.

Similarly, correspondent banking services are not guaranteed, either on an individual company or national basis. These restrictions and conditions, in fact, need not be based on regulatory requirements. For example, multiple Tier 1 banks refuse all transactions related to Sudan, despite the very limited sanctions still imposed on it. And a bank in Southeast Asia lost correspondent services when it failed to identify the owner of a small law firm as being based in Khartoum.

Sovereign states also have the right to enact legislation and regulations as they see fit. While there are international venues, such as the World Trade Organization (WTO), for challenging barriers perceived as unfair, it would behoove firms wishing to conduct significant commerce in or with other nations to understand the legal and regulatory requirements of those countries, as well as the consequences of not following them.

The most prominent examples of enforcement actions (and potential future ones) against firms without a direct nexus to the country imposing the penalty come from the US. The following examples demonstrate some of the regulatory breadth that firms need to be cognisant of, even though the penalties being imposed are identical.

Bank of Kunlun

The Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA) gave the US Treasury Secretary the authority to prohibit domestic banks from providing correspondent services (or put strict conditions on maintaining those accounts) to non-US financial institutions which have participated in a number of Iran sanctions-related activities. These include:

  • Facilitation of Iranian government acquisition or development of certain classes of weapons, or support for foreign terrorist organisations
  • Facilitation of transactions for parties sanctions under specific UN resolutions
  • Laundering of funds related to the above transactions
  • Facilitation of the above transactions for the Central Bank of Iran or other Iranian financial institution, or
  • Facilitation of or provision of financial services for the Iranian Revolutionary Guard Corps (IRGC) or sanctioned parties related to Iran’s nuclear proliferation or support of terrorism activities

China’s Bank of Kunlun’s financial services transactions for six Iranian financial services firms designated by the US met the last set of listed conditions, and resulted in it being placed on the Part 561 List (now the CAPTA List), barring it from correspondent banking services from US financial firms and US branches of foreign financial firms. And this action occurred despite the apparent lack of any transaction involving US parties or the US dollar.

Section 311

Similar to CISADA (and other sections of US sanctions-related laws), Section 311 of the USA PATRIOT Act allows the Financial Crimes Enforcement Network (FinCEN) – a separate part of the US Treasury Department that oversees and enforces US anti-money laundering regulatory compliance as its Financial Intelligence Unit (FIU) – to impose conditions on, or prohibit the opening or maintenance of, correspondent accounts for countries and foreign financial institutions who are of “primary money laundering concern.”

Over the years, a number of Asian firms have had Special Measure 5 (the one which prohibits having correspondent accounts) imposed. These include Macau-based Banco Delta Asia (since 2007) and China-based Bank of Dandong (since 2017), both of which remain on the Section 311 List to this day. It should be noted that it is possible to regain access to correspondent services; Myanmar Mayflower Bank and Asia Wealth Bank both spent 8 years on the list until they were removed in 2012.

The US Court System & Section 319

Section 319 of the USA PATRIOT Act states that, should a foreign financial institution fail to comply with a summons for records related to its US correspondent banking accounts, the Secretary of the Treasury or the Attorney General can direct the correspondent bank to close the related account. Additionally, the firms can be held in contempt of court, and fined, for failure to respond to the subpoena.

At the end of July, a US appeals court upheld a lower court’s contempt finding against three Chinese banks, and ordered fines of USD 50,000 a day on each firm, starting 8 August, for not complying with a subpoena related to an investigation into potential North Korean sanctions violations. Additionally, the order affirmed that Section 319 can be invoked against one of the bank’s US correspondent accounts.

Other penalties?

There are other potential consequences for not fully appreciating the extent of regulatory requirements. For example, a number of US sanctions laws can impose restrictions on access to financial markets short of losing access completely, such as losing the right to be a primary dealer in US securities.

Additionally, if one exports US-origin goods or services to Iran (or, potentially, is part of a conspiracy to do so by providing the financial services to consummate those transactions),  one can be assessed a fine by the Office of Foreign Assets Control (OFAC), the US sanctions regulator – or be barred or restricted from receiving further exports from US companies.

Such was the case with ZTE and COSL Singapore, neither of whose circumstances involved other US activities. While they were not obligated to pay OFAC’s fines, they likely complied to remove (in ZTE’s case) or avoid future restrictions or prohibitions on goods being exported to them.

Reading is fundamental

Once published, a law, regulation, guidance or advisory creates liability for all who are subject to those requirements. Additionally, guidance and advisories create regulatory expectations for the standard of care to be exhibited to those who need to follow the requirements.

While there are some US laws and regulations for which one’s actual knowledge of the requirements is a pillar of determining liability, those are generally limited to personal criminal activity. In general, when it comes to US laws that are binding on corporations and other organisations, ignorance is not an excuse.

So? So, read – all of it – or engage specialists who have and will continue to do so. The potential consequences of running afoul of requirements one is unaware of are too great a risk.

Eric A. Sohn, CAMS is global market strategist and product director, Dow Jones Risk & Compliance in New York.


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