After facing nearly $230 million penalty, BACB pays OFAC scant $4 million for sanctions failings after U.K. regulator states fine would have ‘disproportionate impact’
A United Kingdom-based bank facing hundreds of millions of dollars in sanctions penalties in the United States due to illicit dealings with Sudan made the rare move to ask its home country regulator for help to lower the fine – and it worked, dropping the financial hit from $229 million to less than $5 million.
The discount for British Arab Commercial Bank (BACB) is even more magnanimous when you consider that the U.S. Treasury’s Office of Foreign Assets Control (OFAC) stated the total base penalty the relatively diminutive institution faced was just more than $381 million, an “egregious case” where the bank moved Sudanese-tinged funds worth nearly $191 million.
At issue for the bank is that even though it has been around for nearly 50 years, it only has assets of $3.6 billion and revenues of $3.2 million, so a penalty just north of $230 million would eat up a significant percentage of assets of wipe out decades worth of revenues.
“In consultation with BACB’s domestic regulator, the United Kingdom’s Prudential Regulation Authority, OFAC determined that the bank’s operating capacity was such that it would face disproportionate impact if required to pay the proposed penalty of $228,840,000.”
OFAC it also took into consideration several other mitigating factors, including:
- BACB stated that it ceased engaging in the banned Sudanese transactions meant to circumvent U.S. sanctions conduct described below
- The bank agreed to enter into a settlement agreement and bolster its compliance program in terms of systems, expertise, transaction screening and reporting.
- The bank agreed to a lengthy remediation and identified the individuals involved in the failings, including a member of the compliance team.
- It agreed to pay the $4 million penalty.
OFAC stated the sanctions issues started nearly a decade ago, when between September 2010 and August 2014, BACB processed 72 bulk funding payments involving Sudan totaling $191 million.
In all, even though the bank did not have a U.S. presence, at that time the institution operated U.S. dollar (USD) accounts on behalf of at least seven Sudanese financial institutions, including the Central Bank of Sudan.
It also wasn’t just making a passive mistake due to a lack of knowledge of U.S. sanctions.
It had “actively solicited USD business from Sudanese banks, and processed these USD transactions via an internal book transfer process involving a nostro account maintained at a foreign bank (Bank A).”
Nostro accounts are accounts that a bank holds in a foreign currency in another financial institution and are frequently used to facilitate foreign exchange and trade transactions, two areas at a higher risk for money laundering and sanctions issues.
These transactions were not processed to, or through the U.S. financial system and in OFAC’s eyes were meant to evade the sanctions screening filters employed by many large U.S. and foreign banks.
In the case of BACB’s failings, the process to fund its USD nostro account at Bank B, however, “did involve transactions processed to or through U.S. financial institutions in apparent violation of U.S. economic sanctions administered and enforced by OFAC which prohibited U.S. persons, including U.S. financial institutions, from processing such transactions.”
BACB engaged in nested accounts to make it harder for U.S. institutions to uncover any ties for to Sudan or related entities.
BACB established a USD nostro account in 2006, according to OFAC penalty documents, with a “non-U.S. financial institution located in a country that imports Sudanese-origin oil for the stated purpose of facilitating payments involving Sudan.”
BACB built up and replenished this nostro account by “routing large, periodic, USD-denominated wire transfers into the account (i.e. bulk funding) from non-U.S. financial institutions in Europe.”
The non U.S. financial institutions in Europe then “passed the USD-denominated transfers through banks in the United States for further credit to the USD nostro at the non-U.S. financial institution,” a dynamic that could create challenges for the banks involved to screen for blacklisted countries.
Once the funds arrived in BACB’s USD nostro at this institution, BACB then instructed the institution to process individual payments – for example third-party payments – involving a variety of Sudanese parties, including Sudanese financial institutions.
OFAC also noted a breakdown in bank anti-money laundering (AML) compliance policies and procedures, culture and expertise, stating that several BACB employees, including “certain managers and a member of the compliance team, were aware of this funding arrangement.”
The evasion tactics, according to OFAC were intentional, hence the finding of an egregious failing.
Bank staff and compliance believed all Sudanese transactions, including the inflow of USD to its nostro account at the non-U.S. financial institution “would be processed outside the United States via funding from the BACB accounts in Europe, and understood how it would attempt to circumvent the U.S. sanctions regulations.”
“OFAC’s analysis of the transactional data confirmed a pattern of the bulk funding transactions, which were processed through the United States, corresponding to the third-party payments, which were not processed through the United States,” (via OFAC).
Monroe’s Musings: The creativity of banks to evade U.S. sanctions will never cease to amaze me.
But this actually has several pieces that jumped out at me. First and foremost, I am incredulous, surprised, baffled, flummoxed and, well, flat out flabbergasted that BACB decided to go to its U.K. regulator to ask OFAC for a break – and the regulator actually DID it AND OFAC actually agreed to a massive discount.
I have been covering this field for nearly 13 years and I have never seen this. Yes, I have heard that some smaller banks have used the asset defense as a defense at the negotiating table, but I have never heard of a bank using its home country regulator as a big brother to go take on the bully that is bothering you.
Another point that should not be lost on compliance professionals reading this, even if you see a bank has a compliance team or has written policies and procedures, that doesn’t mean the institution is following them.
And if the bank, as in this case, works with operations in the Middle East with a propinquity to Iran, Sudan and other blacklisted regimes, any bank dealing with them – corresponding banking is a common connection portal – had better engage in more aggressive scrutiny of the actual compliance team to determine if they are worth their salt.
Lastly, being that this is yet another way a bank evaded sanctions to help Sudan, banks should reverse engineer this to see how they can uncover such a dynamic or ask questions to ferret out what other institutions and entities a correspondent or partner bank is engaging to ensure, as in this case, a bank is operating on behalf of Sudanese entities and later doling out U.S. dollars to off-limits third parties.