With trade and economic sanctions becoming an increasingly popular tool of foreign policy in today’s uncertain geo-political climate, it is interesting to note that the US Department of Treasury’s Office of Foreign Assets Control (OFAC) published only seven fines last year. These fines had a settlement total of just $71m for the entirety of 2018, with one fine accounting for nearly 75% of the annual total.
This contrasts with 2017’s total of $119 million and the lofty heights of 2014 when the settlement penalty total sat at $1.2 billion. In the first two months of 2019, four fines have been issued, totaling just over $7 million, a rate that if extended for all of 2019, would result in a new low of around $42 million in fines this year.
Both the fine levied, and the number of cases brought by OFAC has continued to decline in recent years. What has caused this drop in numbers? Have the powers at be at OFAC turned attention to other areas or is this the beginning of the end to trade and sanctions based regulatory focus, as the Trump-led administration focuses on different objectives?
A new trend?
To understand the current environment, there are two important questions; will this trend continue beyond 2018 and if it does, should banks and corporates scale back their trade compliance efforts as a result?
The regulatory actions that OFAC enforce take a considerable degree of effort to investigate and are complex in terms of the detail and information required to bring them to a successful closure. A major North American bank was previously fined for not screening letters of credit with links to sanctioned entities and countries which the regulator subsequently uncovered. This investigation covered business conducted from 2003 to 2011 but the OFAC action itself was only concluded early in 2017.
This length of time between the uncovering of the sanction breach, due process with the investigation and then a resulting penalty is lengthy. It goes some way to explaining a potential fall in OFAC penalties this year but does not provide the overall answer.
The explanation for a lackluster year of OFAC actions can be located where the greatest media attention was directed in 2018. OFAC and other US regulators have invested considerable time and effort to the rescinding of the JCPOA (Joint Comprehensive Plan of Action) covering Iranian sanctions and also vessel restrictions relating to North Korea’s shipment of illicit cargos in the Korean peninsula. These two areas are of major focus for US sanctions regulation in 2018 and are major policy shifts from previous years. The resource and budget to conduct efforts on North Korean and Iranian sanction policy would very likely have moved focus from other areas.
The resource and budget to conduct efforts on North Korean and Iranian sanction policy would very likely have moved focus from other areas
Therefore, 2018 can be seen as a resourcing blip when considering the low number of OFAC enforcement issues thus far. There simply is not enough staff and budget to be able to effectively cover major sanction policy changes and conduct in-depth enforcement actions at the same time. In this context, the lack of OFAC penalties is not here to stay. A large penalty served to a French bank in November 2018 for nearly $54 million is an example of a change to the current level of inactivity.
Alongside the OFAC actions, the United States BIS (Bureau of Industry and Security) have been enforcing and issuing penalties based on export violations at a regular pace. One of the biggest and highest-profile in 2018 was issued to a major US cargo operator for failing to screen entities on its trade finance documentation which led to products being shipped to sanctioned countries.
No policy change
Overall, 2018 is not an anomaly and is not suggestive of a change in regulatory policy. Focus has shifted elsewhere but the attention remains on trade finance and compliance procedures. The JCPOA relating to Iran, illicit vessel activity and related sanctions in the Korean peninsula and the overall threat of penalties and fines could be taken to signify that 2019 will be tougher in terms of the pressures of complying with global trade regulation. In this context, the trade finance landscape in 2019 will have many new obstacles and hurdles for both banks and corporates to overcome.
Focus has shifted elsewhere but the attention remains on trade finance and compliance procedures
The sanctions focus regarding North Korea and illegal trade-based activity has mostly coalesced around the shipment of goods and the vessels used in these cargo movements. In the first half of 2018, the United Nations added 33 ships to its ‘prohibited from port entry’ list, in addition to the work undertaken on the nature of various cargo and their relationship to the proliferation of nuclear weapons.
Increased OFAC emphasis on trade
There is every reason to believe that this same level of concentration and effort on commodity shipments, dual-use items and other traded goods towards North Korea will be conducted by US regulators in relation to Iran and the ending of the JCPOA. This, therefore, implies an increasing, upcoming emphasis from OFAC on trade activity to bolster and further the legislation that has been put in place. The effort and work put into defining the action will mean that regulators will want to enforce that detail when it is warranted.
Banks and financial institutions work closely with regulators so a possible degree of complacency due to the low number of OFAC actions in 2018 should be limited. On the other hand, it is always worth bearing in mind that when the constant stream of fines and penalties is not reaching us through numerous media channels, the foot can be lifted from the accelerator and attempts to remain at the forefront of compliance start to slow. Now would be an appropriate time, as the global regulatory landscape starts to change and becomes even more complex, to review existing trade-based screening software for its relevancy, accuracy and consistency so that future actions from OFAC do not affect your business.
About the author:
Colin Camp is Senior Director – Business Development & Sales, APAC at Pelican, the specialists in applying AI technology to enhance, streamline and secure the payments life-cycle and ensure financial crime compliance.