OFAC: What Banks Don’t Know Can (and Should) Hurt

By Sentry Team

The Treasury Department’s Office of Foreign Assets Control (OFAC) issued an important, if complicated, penalty last week against Barclay’s Bank for processing transactions related to sanctioned entities in Zimbabwe.  Although the total amount, $2.49 million, pales in comparison to some of the massive penalties the agency has issued against banks in recent years, this one has critical implications for enforcement of sanctions against entities with many subsidiaries, a common practice in places like Sudan.

The penalty stems from OFAC’s rule that any entity that is 50% owned-or-controlled by a sanctioned individual or entity is de facto subject to sanctions.  So, when the Industrial Development Corporation of Zimbabwe was designated in 2008, all of the subsidiaries it owned or controlled were also deemed to be sanctioned, even though those other entities were not named by OFAC or put on any list.  Instead, it is up to banks and all other U.S. persons to conduct due diligence on beneficial ownership and make that determination and take the necessary compliance steps.

Through a series of circumstances described by OFAC, Barclay’s entities (including its UK parent and branches in Zimbabwe and the United States) failed in two respects: (i) they did not collect the necessary beneficial ownership information in order to conduct due diligence, and (ii) even when they did have the information, the compliance system did not enable full integration, so that Barclay’s UK was not always aware of what Barclay’s Zimbabwe knew.  Interestingly, after several attempts to make corrections, Barclay’s could not get it right and paid the price.

What do we take away from this?

• Comprehensive sanctions compliance is difficult… Given the complexity of modern corporate structures and the ability of companies to use jurisdictions where key beneficial ownership information is shielded from the public, banks and other U.S. persons face a complicated task.

• But essential. No matter how difficult and costly, if banks and other U.S. persons do not conduct effective due diligence, then the impact of sanctions is muted, or lost altogether.  IDCZ and its corporate family were able to conduct over 150 transactions through Barclay’s (and undoubtedly other banks), over the course of several years, even after sanctions were imposed.  Without more effective implementation by banks and similar penalty actions by OFAC, sanctioned entities will continue to survive and undermine U.S. national security and foreign policy interests.

• OFAC should identify more owned/controlled entities to its list. One potential result of this penalty is a furthering of “de-risking,” which often hurts financial inclusion and access for the general population in countries subject to targeted sanctions.  By creating a clearer road for compliance, OFAC could indirectly open up more channels for banks and U.S. persons to know who they can and cannot do business with, rather than avoid countries altogether.

Read the full penalty statement.