Foreign Bank Settlement of U.S. Sanction Investigations

, New York Law Journal


Thomas E. L. Dewey
Thomas E. L. Dewey

The specter of foreign bank violations of U.S. economic sanctions reared its head again in December. The Royal Bank of Scotland Group plc and The Royal Bank of Scotland plc (together, for the purposes of this article, RBS) have been investigated for violations of U.S. law, following accusations that RBS engaged in transactions that involved countries subject to international sanctions, such as Iran, Sudan and Burma. In separate actions, RBS agreed to settlements with the Board of Governors of the Federal Reserve System, the Office of Foreign Asset Control (OFAC), and the New York State Department of Financial Services (DFS). The combined settlement total was $100 million. This is another bump in the road for RBS, which was bailed out by the UK government and currently owns 81.14 percent of the RBS Group;1 there are also, however, several features of interest in the settlements.

Claims Asserted

In 2010, RBS initiated an investigation into its U.S. dollar payment practices in the UK.2 The concern was that RBS U.S. dollar transactions were violating U.S. sanctions programs relating to Iran, Sudan, Burma and Cuba. The investigation concerned procedures that allowed RBS to process transactions linked to U.S. sanctioned entities through U.S. banks without detection.

On July 26, 2011, RBS and its U.S. branches entered into a cease and desist order to address U.S. branch compliance with the Bank Secrecy Act, regulations issued thereunder by the U.S. Department of the Treasury and Regulation K of the Board of Governors.3 The order also addressed the implementation of OFAC regulations.4

To resolve the continuing investigations, in December 2013, RBS agreed to enter into settlement agreements with the Federal Reserve, OFAC and the DFS.

The Settled Resolution

Separate but simultaneous consent orders record the RBS settlements with the Federal Reserve, OFAC and the New York State DFS. Under these agreements, RBS has agreed to pay $50 million to the DFS and $50 million to the Federal Reserve, of which $33 million is attributed to the OFAC settlement penalty.5 These settlements resolve the civil aspect of the investigation and both the U.S. Department of Justice and the district attorney of New York concluded that no criminal action is to be taken against RBS.6

The $100 million settlement figure may dominate the headlines,7 but the real points of interest in these settlements are more subtle. The consent orders demonstrate an intriguing narrative, not least because the United Kingdom's Financial Conduct Authority has promised to assist with enforcement, but also due to RBS's apparent admission of failings.

Failings Acknowledged

RBS, in a press release commenting on the settlement, announced that "RBS plc has cooperated fully with the U.S. Authorities and acknowledges and deeply regrets these failings."8 When coupled with a notable absence of "no-admit-no-deny" language in both the Federal Reserve and DFS settlements, the question is raised as to whether admissions, or the semantically identical 'acknowledgment of failings,' in settlements are on the rise. The topic of admissions in settlement agreements, of course, is an area of current interest following the "no-admit-no-deny" policy announced by U.S. Securities and Exchange Commission Chairwoman Mary Jo White in 2013. Such a policy, which demands accountability through an admission, presents litigants with a much tougher road to settlement than they have had in the past.

The consent order between RBS and the Federal Reserve criticizes RBS practices as "unsafe or unsound."9 It summarizes historic RBS practices into two failings. First, that RBS lacked adequate risk management and legal review policies to ensure compliance with OFAC regulations. Second, that from at least 2005 to 2008 some business lines within RBS adopted policies for processing U.S. dollar transfers in a manner that either violated applicable OFAC regulations or contained details too vague for U.S. authorities to determine their legality.

The consent order between RBS and DFS hones in on the lack of transparency in RBS's U.S. dollar transfer dealings. In contrast to the consent order with the Federal Reserve, it goes further by including salacious detail. First, the scale of the matter is revealed. More than 3,500 transactions concerning Iranian and Sudanese customers, valued at approximately $523 million, went through New York correspondent banks.10

Second, the mode of deception is admitted. In order for sanctioned customers to gain access to the U.S. financial system, RBS gave UK employees written step-by-step instructions on how to conceal U.S. dollar payments involving sanctioned entities being routed through the United States. The consent order explains that this was done by stripping identifying information from the transfers to prevent its own payment system from automatically picking up references. A caption from the ill-fated guide is even reproduced in the consent order.11

Third, it reveals how high these violations went in the corporation. RBS group head of Anti-Money Laundering and the head of Global Banking Services for Europe, Middle East and Africa "were fully aware of and in some instances even provided such instructions to employees."12

The narrative of these agreements comes at an interesting time for the issue of admissions in settlements. In 2013, SEC Chair White announced a move away from the "no-admit-no-deny" policy for settling cases. Instead, a new policy was adopted whereby, in appropriate cases, the SEC would demand an admission of liability. The rationale, as explained by White, is that in particularly egregious cases monetary penalties alone are insufficient and admissions are required to deliver public accountability.13 This policy was first implemented in the settlement between the SEC and the hedge fund Harbinger Capital Partners and Philip Falcone, its founder.

Certainly, the RBS and DFS consent order indicates a similar hunger for public accountability. However, posing a curious anomaly, the settlement agreement between RBS and OFAC does contain "no-admit-no-deny" language.14 This is, seemingly, not unusual in OFAC violation settlements. For example, the settlement agreement between Standard Chartered Bank and OFAC, relating to similar issues of sanction compliance in 2012, contained near identical no-admit-no-deny language.15

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