Libyan Sanctions Give Banks Compliance Headaches

When President Obama called for banks to freeze assets held by the government of Libya last month, more than $32 billion was uncovered in U.S. banks.

These economic sanctions create an instant compliance headache for banks that suddenly find themselves holding funds for a regime that has been targeted for using brutal force against a populist uprising. There are no immediate penalties for retaining the assets, of course, since previous sanctions against Libya were lifted in 2004, but they now have some hoops to jump through to avoid strict penalties.

The United States first imposed economic sanctions on Libya in 1986, after a terrorist bombing at a West Berlin club frequented by Americans in the military, according to the U.S. Department of State. The United Nations imposed sanctions in 1992, after Libya was implicated in the 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland. Libya became economically isolated until 2003, when it finally complied with all the U.N.'s resolutions related to the Pan Am incident—the United Nations lifted sanctions that year, and the United States lifted its sanctions in September of 2004.

The United States re-imposed sanctions against the Libyan government on February 25. “Once the U.S. sanctions were imposed, the financial institutions then had to search their data bases to identify and block assets of Libyan agencies, as well as assets of entities controlled by the government of Libya,” says Corinne Goldstein, partner at the law firm Covington & Burling.

The majority of assets frozen pursuant to Obama's executive order were cash and securities, according to Marti Adams, a spokeswoman at the U.S. Treasury department.

The $32 billion amount cannot be compared to previously reported figures, such as what U.S. banks report to the Treasury International Capital system, since there are differences in the scope and coverage of that data and assets subject to blocking under U.S. sanctions, Adams says.

The full dollar amount of Libyan funds held by U.S. banks was only revealed because the sanctions required banks to report blocked assets to the Treasury Department.

Regulations administered by the Treasury Department's Office of Foreign Assets Control require any person, including financial institutions, holding blocked property to report to OFAC within 10 business days after property becomes blocked. These reports must include, among other information, the identity of the owner, its location, its actual or estimated value, and the date it was blocked, according to the Code of Federal Regulations (CFR) chapter “Money and Finance: Treasury” (Title 31) in part 501, “Economic Sanctions Enforcement Guidelines.”

“Freezing funds is painful, but not too complicated, particularly for large banks. They are highly sophisticated, heavily regulated, and widely automated.”

—J. Scott Maberry,

Partner,

Fulbright & Jaworski

The penalties for those who fail to report can be severe, ranging from heavy fines to time behind bars. Under the International Emergency Economic Powers Act, which is the authorizing statute for most of the sanction programs, civil penalties can climb to $250,000 per violation or twice the value of the transaction, whichever is higher, and criminal penalties can run as high as $1 million and up to 20 years in prison— though penalties for failures to timely report are generally much, much lower, Goldstein says.

“Banks are typically very sophisticated in the sanctions compliance area,” says J. Scott Maberry, a partner at the law firm Fulbright & Jaworski. “Freezing funds is painful, but not too complicated, particularly for large banks. They are highly sophisticated, heavily regulated, and widely automated.” Any problems would likely come from smaller banks that have less experience in the area, says Maberry

“Once it has been determined that funds need to be blocked, they must be placed into an interest-bearing account on your books from which only OFAC-authorized debits may be made,” said OFAC on its Website. Some banks will then open separate accounts for each blocked transaction, while others have opted for one over-riding account titled, for example, "Blocked Libyan Funds." OFAC says it is fine with either method, so long as “there is an audit trail which will allow specific funds to be unblocked with interest at any point in the future.”

The governing statute for the Libyan sanctions contains civil and criminal provisions for entities and individuals, but the prospect of individual liability for a CCO is remote, says Maberry. “Individuals who get slammed for sanctions violations are typically either active wrongdoers—who can and do get sentenced to prison for egregious cases—or inadvertent violators, who can be fined or subjected to other civil and administrative penalties or let off with a warning,” says Maberry. “Someone overseeing a good faith compliance effort, even if a glitch results in a violation, is very unlikely to go to jail.”

OFAC GUIDANCE

The following excerpt from the Office of Foreign Assets Control is relating to, entities owned by persons whose property and interests in property are blocked:

This guidance responds to inquiries received by the Department of the Treasury's Office of Foreign Assets Control relating to the status of entities owned by individuals or entities designated under Executive orders and regulations administered by OFAC.

Property blocked pursuant to an Executive order or regulations administered by OFAC is broadly defined to include any property, tangible or intangible, or any interest therein, including present, future or contingent interests. A property interest subject to blocking includes interests of any nature whatsoever, direct or indirect.

A person whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (a "blocked person") is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or greater interest. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC's list of Specially Designated Nationals ("SDNs"). Accordingly, a U.S. person generally may not engage in any transactions with such an entity, unless authorized by OFAC. In certain OFAC sanctions programs (e.g., Cuba and Sudan), there is a broader category of entities whose property and interests in property are blocked based on, for example, ownership or control.

U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which a blocked person has a significant ownership interest that is less than 50 percent or which a blocked person may control by means other than a majority ownership interest. Such entities may be the subject of future designation or enforcement action by OFAC. Furthermore, a U.S. person may not procure goods, services or technology from, or engage in transactions with, a blocked person directly or indirectly (including through a third-party intermediary).

As OFAC issues regulations implementing new sanctions programs, this guidance will be incorporated into those regulations. In addition, OFAC expects to amend existing sanctions programs to incorporate this guidance into the regulations implementing those programs.

Source: Office of Foreign Assets Control Guidance.

So what should a compliance officer do to ensure full compliance with these new sanctions? “A compliance officer should make sure that they have a really good risk-based compliance program in place that is appropriate for the [size of their] financial institution,"  says Karen McGee, a partner in the law firm Barnes & Thornburg.

Compliance officers should also ensure that their financial institutions have an automated system that regularly scans the Specially Designated Nationals List maintained by OFAC at the Treasury Department to make sure any person that they're doing business with is not named on that list, says McGee. All U.S. persons, wherever located, are prohibited from doing any type of business with an individual or entity named on that list.

“What constitutes an adequate compliance program depends in large part on who your customers are and what kinds of business you do,” OFAC said on its Website. “Certain areas of bank operations, such as international wire transfers and trade finance, are at a higher risk than others. There are numerous interdiction software packages that are commercially available.”

“For a compliance officer, this is a strict liability. You just ask the question: Is this financial institution doing business with somebody named on this list?” says Linda Weinberg, also a partner in the law firm Barnes & Thornburg.

OFAC's ‘‘Economic Sanctions Enforcement Guidelines'' have been effective since November 9, 2009. They define an apparent violation as “conduct that constitutes an actual or possible violation of U.S. economic sanctions laws, including the International Emergency Economic Powers Act, the Trading With the Enemy Act, the Foreign Narcotics Kingpin Designation Act, and other statutes administered or enforced by OFAC, as well as executive orders, regulations, orders, directives, or licenses issued pursuant thereto.”