Michael J. Lowell October 21, 2015 Inside the Investigation and Prosecution of AML/BSA and Sanctions: Focus on Sanctions Enforcement Michael J. Lowell October 21, 2015

Agenda Background Legal Authorities Enforcement Principles “Lessons Learned” Trends Key Takeaways

Background - OFAC Office of Foreign Assets Control (OFAC) Administers and enforces economic sanctions programs $30-31 million budget 170 people Mostly lawyers and intelligence analysts – reviewing classified intel reports, financial records, corp. registration Recognized by Congress as essential personnel for government shutdown

Background – Sanctions Programs Cuba Iran Sudan Syria Counter Narcotics Trafficking Counter Terrorism Cyber-related Non-proliferation Rough Diamond Transnational Criminal Organizations Burma Ukraine / Russia-related North Korea Venezuela Balkans-Related Sanctions Belarus Sanctions Central African Republic Cote d’Ivoire (Ivory Coast) Democratic Republic of Congo Iraq Lebanon Former Liberian Regime Libya Magnitsky Somalia South Sudan Yemen Zimbabwe

Legal Authorities Legal Framework International Emergency Economic Powers Act, 50 U.S.C. Section 1701- 1707 (“IEEPA”) Trading With the Enemy Act, 50 U.S.C. Section 5 (“TWEA”) 31 C.F.R. 510 – 598 Various statutes and executive orders Reporting, Procedures and Penalties Regulations 31 C.F.R. 501 OFAC Enforcement Guidelines 74 Fed. Reg. 57593 (November 9, 2009) OFAC Civil Penalties and Enforcement Information

Legal Authorities - Penalties Trading with the Enemy Act - $65,000 International Emergency Economic Powers Act (IEEPA) - $250,000 or 2x the value of the transaction Foreign Narcotics Kingpin Designation Act - $1,075,000 Criminal Penalties $1 million or 2x value; imprisonment Larger penalties under Kingpin Act Other Consequences: Revoked licenses Debarment Liability for related violations Reputational risks

OFAC Sanctions Penalties & Enforcement: Enforcement Principles What Triggers an Investigation? Self disclosures Blocking and reject reports Current investigations Agency referrals Publicly-available information Informants ISIS Toyota Trucks

OFAC Sanctions Penalties & Enforcement: Enforcement Principles Strict liability Civil penalties may be imposed on a strict liability basis In the matter of: Aluminum Company of America, 64 FR 42641-02 (Aug. 5, 1999) (finding that “liability and administrative sanctions are imposed on a strict liability basis once the Respondent commits the proscribed act'') Iran Air v. Kugelman, 996 F.2d 1253 (D.C. Cir. 1993) (knowledge is not an “essential element of proof for the imposition of civil penalties''). Risk-based compliance “OFAC agrees that financial institutions should take a risk-based approach when considering the likelihood that they may encounter OFAC issues.” - www.treasury.gov/resource-center/sanctions/Documents/matrix.pdf OFAC will consider “an institution’s risk-based compliance program in assessing the appropriate enforcement response” – 74 FR 57593 at 57597 (Nov. 9, 2009)

OFAC Sanctions Penalties & Enforcement: Enforcement Responses Criminal Referral Civil Penalty Finding of Violation Cautionary Letter No Action Types of Responses Anywhere from 750 – 1,000 open inquiries at any time Average closure of a few hundred each year with “no action” or “cautionary letters” (cautionary letter is the most common response) “No Action” – insufficient evidence to conclude that a violation has occurred or does not warrant administrative response based on General Factors “Cautionary Letter” – insufficient evidence to conclude that a violation has occurred or finding of violation/penalty is not warranted, but conduct may lead to violation or person is not exercising due diligence in compliance “Finding of Violation” - OFAC

OFAC Sanctions Penalties & Enforcement: Enforcement Responses – General Factors Willful or Reckless Violation Awareness of Conduct Harm to Sanctions Objectives Individual Characteristics: Commercial Sophistication Size of Operations Financial Conditions Volume of Transactions Sanctions History Compliance Program Remedial Response Cooperation with OFAC Timing of Apparent Violation Other Enforcement Action Future Compliance / Deterrence Effect Other Relevant Factors Totality of Circumstances Every enforcement case officer will have the guidelines on their desk Every case requires a memo addressing each of these factors Characteristics of the Violator Individual characteristics Compliance program Cooperation Previous enforcement Future compliance / deterrence effect Characteristics of the Violation Willful or reckless Sanctions harm Timing of violation Remediation Awareness of conduct Source: 74 Fed. Reg. 57593 (November 9, 2009)

OFAC Sanctions Penalties & Enforcement: Enforcement Penalties

OFAC Sanctions Penalties & Enforcement: Enforcement Penalties

OFAC Sanctions Penalties & Enforcement: Enforcement Principles Base Calculation of Civil Penalties Under U.S. Law Not Egregious Egregious Voluntary Self-Disclosure One-half of Transaction Value (capped at $125,000 per violation/$32,500 per TWEA violation) One-Half of Applicable Statutory Maximum No Voluntary Self-Disclosure Applicable Schedule Amount (capped at $250,000 per violation/$65,000 per TWEA violation) Applicable Statutory Maximum Source: 74 Fed. Reg. 57593, 57606 (2009).

OFAC Sanctions Penalties & Enforcement: Enforcement Principles Application to Enforcement Cases (2011-2015) Not Egregious Egregious Voluntary Self-Disclosure 21 Total: $13,312,009 8 Total: $944,800,569 No Voluntary Self-Disclosure 54 Total: $25,641,080 15 Total: $1,863,505,906 Source: 74 Fed. Reg. 57593, 57606 (2009). * Double-counts cases where some penalties egregious and some non-egregious; does not reflect cases where OFAC did not make a finding on the issue

OFAC Sanctions Penalties & Enforcement: Enforcement Principles Voluntary Disclosure Self-initiated notification to OFAC of an apparent violation prior to or at the same time that OFAC or any federal, state, or local government agency or official discovers the apparent violation or another substantially similar apparent violation Not a voluntary disclosure if: Apparent violation already discovered by government Series of similar apparent violations or related to the same practice or pattern of conduct Third-party is required to and does notify OFAC because of blocked or rejected transaction (regardless of when notification was received) Contains false or misleading information Materially incomplete Not self-initiated Whistleblower “Apparent violation” – conduct that constitutes an actual or possible violation of sanctions

OFAC Sanctions Penalties & Enforcement: Examples of Egregious Cases MSB screening and flagging 136 transactions for $7,091, but dismissing flags 6 times because employees didn’t understand flags or process Non-profit transferred $236,000 to Iraq; OFAC put the non-profit on notice of violations and president approved Foreign bank processed thousands of transactions through U.S. financial institutions for sanctions targets; management was aware of conduct and exercised “reckless disregard” for sanctions; transactions harmed sanctions objectives Large U.S. Bank demonstrated ”reckless disregard” for sanctions requirements At least one official with sanctions responsibility identified a deficiency that prevented the bank from identifying potential matches to individuals with multiple or multi-part names It took more than 2 years to address the deficiency Particularly serious violation calling for a strong enforcement response Substantial weight to General Factors A, B, C, and D Egregious Willful or reckless violation of law Awareness of conduct Harm to sanctions Objectives Individual Characteristics Bank of America was the bank Appx 208 transactions for about $91,000; only a portion were egregious (post-discovery of deficiency in 2006)

OFAC Sanctions Penalties & Enforcement: Enforcement Principles Percentage of Base Penalty Imposed (2011-2015) Not Egregious Egregious Voluntary Self-Disclosure Average: 68% Range: 31% - 161% * Two cases had an increase Average: 72% Range: 35% - 144% * Only one case had an increase No Voluntary Self-Disclosure Average: 55% Range: 4% - 135% * One case had an increase Average: 75% Range: 3% - 310% Source: 74 Fed. Reg. 57593, 57606 (2009). Reflects that enforcement penalties can be “more art than science” Does not reflect significant number of cases closed out with no penalty Outlier numbers typically reflect very large or very small overall penalties

OFAC Sanctions Penalties & Enforcement: Penalty Per Apparent Violation

OFAC Enforcement: The Role of the Compliance Program No mandatory compliance program Risk-based General factor affecting administrative action Key elements: Commitment to Compliance Risk Assessment Awareness & Training Internal Controls Responsible Person(s) Monitoring/Audits

Applying “Lessons Learned”: Gaps in Screening – Calibration / Keywords Identification of key sanctions-related keywords Burmese, Cuban, Iranian, Sudanese, Tehran, Khartoum, etc. Acronyms “BMICJSCMOSCOWRUSSIA” Multiple names Example: Carlos Alberto Sanchez Osuna Name variations Example: “Higher Institute for Applied Science and Technology” vs. “Higher Institute of Applied Science and Technology” In-process transactions

Applying “Lessons Learned”: Gaps in Screening – Match Resolution Match escalation Does the match indicate why it was flagged? Does the recipient know what to do with it? Further prevention Block implemented, then what? Testing internal controls Fix deficiencies Evaluate relationships

Applying “Lessons Learned”: Customer / Supplier / Distributor Due Diligence Incorporate information / expand vetting: Utilizing all information in possession (e.g., customer profile) Documents you receive Payment instructions “Public domain” Distributor / partner markets Evaluate relationships Review the documents you receive Citi Penang - $217,841 (September 2014) Review information about your supplier in the “public domain” ESCO Corporation - $2,057,540 (November 2014) Review information about your end users in the “public domain” Indam International - $44,850 (October 2014) Review your distributor’s markets Epsilon - $4,073,000 (July 2014)

Applying “Lessons Learned”: Decision-making, Management, and Participation U.S. person approvals / supervision Foreign persons in the United States Technical support and repairs Coordination and involvement of U.S. person Successor Liability Schlumberger Oilfield Holdings Ltd. (“SOHL”) (British Virgin Islands) entered guilty plea and agreed to $232.7 million in financial penalties Charge: Conspiring to willfully facilitate transactions and engage in trade with Iran and Sudan, in violation of the International Emergency Economic Powers Act (“IEEPA”) Most of the conduct occurred outside of the U.S. but company maintained Texas business unit that approved the conduct $155 million criminal fine, the largest criminal fine ever assessed in connection with an IEEPA prosecution Weatherford & World Fuel Services There is no transition period. “U.S. persons acquiring entities outside the United States should consider OFAC compliance as part of their due diligence review of the acquisition.” Dal-Tech Devices, Inc. (Jan. 18, 2013) Ellman International, Inc. (Jan. 2, 2013)

OFAC Sanctions Penalties & Enforcement: OFAC Investigation Trends

OFAC Sanctions Penalties & Enforcement: OFAC Monetary Penalty Trends

OFAC Sanctions Penalties & Enforcement: Trends “Instead of being a secondary measure, as in the past, economic sanctions have become a centerpiece of national security policy.” - Washington Post (March 23, 2011) Libya Protests Begin (February 15, 2011) Executive Order 13566 (February 25, 2011) Pro-Russian Protests in Ukraine (February 23, 2014) Executive Order 13660 (March 6, 2014)

OFAC Sanctions Penalties & Enforcement: Trends In the 2014-15 fiscal year, which ended on Sept. 30, U.S. law enforcement officials filed fresh charges just twice against those suspected of attempting to smuggle weapons and related technology from the United States to Iran, according to court records. Eight such cases were brought in 2013-14. By comparison, around 10 to 12 such cases were brought in each of the preceding six years The official added there was already a "reticence" in some agencies and U.S. federal prosecutors' offices to pursue the cases because they are so tough to build and time-consuming. "And if we're going to normalize things with Iran soon, people are asking, 'Is it worth it?'"

OFAC Sanctions Penalties & Enforcement: Trends OFAC did not authorize “new investment” and “financial services” for Burma until July 11, 2012 – following announcement 2.5 months earlier OFAC Iran sanctions changed reported as changing almost one year ago – November 2013 Cuba sanctions – more than one month delay; and still not clear from headline

OFAC Sanctions Penalties & Enforcement: Trends “[T]he purpose of enforcement action includes raising awareness, increasing compliance, deterring future violations, and not merely punishment of prior conduct.” - Enforcement Guidelines, 74 Fed. Reg. at 57599. Stainless steel pipes Car stereo Duct fabrication system Recreational law chairs Frozen passion fruit juice Nickel briquettes

Key Takeaways Test your screening process for gaps; test screening match escalation Utilize information about your customers / suppliers / partners Risk assessments Change creates risk – consider communication within your organization Address known deficiencies quickly Use the Enforcement Guidelines Reactive vs. Proactive Reactive vs. Proactive – almost as valuable – maybe more valuable – how you respond to violations

Michael J. Lowell Co-Chair of the firm’s Anti-Money Laundering and Trade Sanctions Group Counsels clients on trade and regulatory enforcement matters, including export controls, economic sanctions, anti-money laundering, anti-bribery, and other laws governing cross-border transactions Advises multinational companies from a wide range of industries, including financial services, defense and aerospace, manufacturing, life sciences, and energy and natural resources. Focuses on the legal regimes that govern international trade, including: Sanctions administered by the Office of Foreign Assets Control (“OFAC”) Export controls, including the Export Administration Regulations ("EAR") and International Traffic in Arms Regulations ("ITAR") Foreign Corrupt Practices Act (“FCPA”) mlowell@reedsmith.com +1 202 414 9253 Washington, D.C.