The right stuff: whose job is it to manage regulatory risk?

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SOFA 2013

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  • 1. Work Session The Right Stuff Jeremy James Wills Scott Kinney Sausser Wells Fargo SWIFT OFAC Bank SWIFT Operations Forum Americas - March 5, 2013 1
  • 2. The right stuff: Whose job isit to manage regulatory risk?Jeremy Sausser – OFACScott Kinney – Wells Fargo BankJames Wills – SWIFT v05
  • 3. The Problem Testing Tuning Demo 3
  • 4. The Problem Testing Tuning DemoThe challenge (and costs) keeps growing…
  • 5. Managing Frequent OFAC Updates “Instead of being a secondary measure, as in the past, economic sanctions have become a centerpiece of national security policy.” - Washington Post 03/23/2011 Jeremy Sausser Compliance Officer
  • 6. Who is OFAC? OFAC administers and enforces economic and trade sanctions against targeted: Foreign governments Individuals Entities Vessels PracticesOFAC is Not a Bank Regulator OFAC cannot mandate compliance; however We can (and do) impose penalties for violations We work with the regulators in their role of ensuring compliance by U.S. financial institutions
  • 7. Jurisdiction – To Whom Does OFAC Apply?• Individuals located anywhere in the world, doing business in the United States or through U.S. persons• Corporations located anywhere in the world, doing business in the United States or through U.S. persons• Transactions: – Transactions by foreign persons to the extent that they involve the United States; – Transactions in property of a blocked person that comes within the United States; – In limited circumstances, transactions involving controlled U.S.-origin goods or technology.
  • 8. OFAC Terminology: Blocking v. Rejecting BLOCKING REJECTING“Freezing” assets under Underlying transaction thatU.S. jurisdiction is prohibited, but contains no “blockable” interestAcross-the-boardprohibitions against U.S. person must simplytransfers or transactions refuse to process theregarding the blocked transactionpropertyTitle of blocked propertyremains with sanctionedtarget
  • 9. Blocked & Rejected Transactions Reports - Due within 10 days of blocking/reject - Filling Options – Voluntary forms are available on OFAC’s website • May be mailed or faxed to 202-622-2426 - Annual Reports of Blocked Property due by September 30 Forms can be located on OFAC’s webpage at: center/sanctions/Pages/forms-index.aspx
  • 10. OFAC Terminology: Licenses General License Specific LicenseRegulatory provision authorizing Written authorization from OFAC on aotherwise prohibited transactions case-by-case basis• No separate or written authorization Issued to a specific individual or company; necessary allows a specific activity that would• Published in the regulations, and/or otherwise be prohibited issued on OFAC’s website General Licenses Prohibited Non-prohibited Activities Specific Activities Licenses Including exempt activities
  • 11. TFI Goals SMART SANCTIONS:Devise, Develop, Implement & Enforce Objectives Means and Strategies •Craft new authorities through: • Executive Orders Devise • Engagement with Congress • Inter-agency collaboration •Issue financial sanctions regulations Develop •Identify sanction targets •Develop policies on licenses or exemptions •Designate targets •Conduct outreach to foreign governments, regulators, and other persons, including banks and Implement & exporters Enforce •Issue licenses (either general or specific licenses) •Identify apparent violations and apply appropriate enforcement actions
  • 12. Targeting OFAC targets the entire network engaging in certain activities, for instance, in the WMD context, OFAC targets proliferators, their supporters and support structures, and their assets: WMDProliferators Individual Organization SupportStructures Financiers Logistical Front Company Shipping Lines Support & Suppliers 12
  • 13. Specially Designated Nationals (SDN) List OFAC’s prohibited parties list Over 6,000 individuals and entities identified by OFAC Individuals, entities, vessels, banks all over the globe who are owned, controlled by, or acting on behalf of targeted governments or groups UPDATED FREQUENLY
  • 14. Sanctions Programs Active Sanctions Programs (23)Balkans Iran North KoreaBelarus Iraq SudanBurma Lebanon SyriaCote d’Ivoire Liberia Somalia Transnational CriminalCuba Libya2 OrganizationsCongo Kingpin Narcotics YemenDiamond Trading Narcotics Trafficking ZimbabweGlobal Terrorism NPWMD
  • 15. Comprehensive Sanctions Programs • Cuba • Iran • Sudan • SyriaThese countries have trade restrictions!
  • 16. Limited Sanctions Programs• Burma• North Korea• Diamond Trading
  • 17. List-Based Sanctions Programs: Regimes• Balkans• Belarus• Congo• Ivory Coast• Iraq•Liberia• Libya• Zimbabwe
  • 18. List-Based Sanctions Programs: Activities• Terrorism• Proliferation• Narcotics Trafficking• Lebanon•Yemen• Somali Piracy•TransnationalCriminalOrganizations
  • 19. Sanctions ImpactIran – Under various Iran-related authorities, OFAC has designated over 360individuals and entities linked to Iran’s weapons of mass destruction program, itssupport for terrorism, and sanctions target Iran’s energy and trade. o As a result of U.S. sanctions and outreach: • Most foreign financial institutions have dramatically reduced their business w/ Iran. • Those foreign financial institutions that run afoul of U.S. sanctions risk having their access to the U.S. banking system restricted or being cut off – Pursuant to CISADA, in July 2012 Treasury identified Kunlun Bank in China and Elaf Islamic Bank in Iraq. • Reports indicate that Iranian oil-revenues have dropped by 50% translating into a 40% drop in Iran’s total revenue intakeBurma –Sanctions targeted the Burmese regime’s repression of democracy. o As Burma made progress in political reform Treasury has eased sanctions • Sanctions no longer prohibit U.S. persons from engaging in new investment in Burma • Sanctions no longer prohibit U.S. banks from exporting financial services to Burma
  • 20. Iran Transactions &Sanctions Regulations (ITSR) • Replace the Iran Transactions Regulations • Include provisions for blocking all Iranian Financial Institutions and the Government of Iran. (E.O. 13599) • Contain new General Licenses and other changes • Contain prohibitions applicable to foreign entities that are owned or controlled by U.S. persons.
  • 21. But that’s not all…• Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010• National Defense Authorization Act for FY 2012• Iran Threat Reduction & Syrian Human Rights Act• E.O.s 13606, 13608, 13622 and more!• Iran Freedom and Counter-Proliferation Act for 2012• And….
  • 22. Compliance Programs Risk Assessment InternalResponsible Controls/DueIndividuals Diligence Testing/ Training Internal Audit
  • 23. EnforcementStrict Liability in a Risk-Based Environment
  • 24. EnforcementCivil Penalties (Statutory Maximums):$65,000 Trading With the Enemy Act$250,000 International Emergency Economic Powers Act (or twice the value of the transaction)$1,075,000 Foreign Narcotics Kingpin Designation Act$55,000 Anti-Terrorism and Effective Death Penalty ActBig Bank Cases - Total settlement value since 2005: over $3billion
  • 25. EnforcementHow does OFAC learn about violations?• Voluntary disclosures• Blocking and reject reports• Current investigations• On-site audits• Referrals from other agencies• Other publicly available information
  • 26. INFORMATION GATHERING Subpoena Authority (31 C.F.R. § 501.602): • If OFAC determines that additional information regarding an apparent violation is needed, it may request further information from the Subject Person or third parties, including through an administrative subpoena. • Every person is required to furnish under oath ... at any time as may be required ... complete information relative to any transaction ... subject to the provisions of this chapter or relative to any property in which any foreign country or any national thereof has any interest of any nature whatsoever, direct or indirect.
  • 27. Your Preparation, Actions, and Responses• Can you identify the relevant business units/employees & databases/systems that contain responsive information• Procedures for the identification, collection, analysis, organization, & delivery of responsive documentation• Case management system to track the status of cases – From Excel Spreadsheet to sophisticated• Prepared to understand the underlying cause of the violation and undertake appropriate remedial action. • Confirmation of screening / audit trail • Documentation explaining the institution’s actions
  • 28. 2009 Enforcement GuidelinesCharacteristics of the Violation - Willful or reckless - Sanctions harm - Timing of violation Characteristics of the Institution - Remediation - Individual characteristics - Awareness of conduct - Compliance program - Cooperation with OFAC - Previous enforcement actions - Future compliance/deterrent effect Proportionality / Other relevant factors
  • 29. Enforcement Guidelines – General FactorsA. Willful or Reckless Violation of Law • Willfulness • Recklessness • Concealment • Pattern of Misconduct • Prior Notice • Management Involvement
  • 30. Enforcement Guidelines – General FactorsB. Awareness of Conduct at Issue • Actual Knowledge • Reason to Know • Management InvolvementC. Harm to Sanctions Program Objectives • Economic or Other Benefit to the Sanctioned Individual, Entity, or Country • Implications for U.S. Policy • License Eligibility • Humanitarian Activity
  • 31. Enforcement Guidelines – General Factors D. Individual Characteristics • Commercial Sophistication • Size of Operations and Financial Condition • Volume of Transactions • Sanctions Violation History
  • 32. Enforcement Guidelines –General FactorsE. Compliance Program • Existence and nature of OFAC compliance program • Views of regulatorsF. Remedial Response • Steps taken • Conduct stopped? • Compliance program implemented/improved? • Thorough review to identify other possible violations?
  • 33. Enforcement Guidelines – General Factors G. Cooperation with OFAC • Voluntarily Self-disclosure? • Provide all Information? • Other Related Violations? • Subpoena Required? • Prompt Response? • Tolling Agreement?
  • 34. Enforcement Guidelines –ClarificationNon-VSD, but substantial cooperation… “in cases involving substantial cooperation with OFAC but no voluntary self-disclosure… but the Subject Person provides substantial additional information regarding the apparent violation and/or other violations, the base penalty amount generally will be reduced between 25 and 40%”
  • 35. Enforcement Guidelines – General FactorsH. Timing of Apparent Violation in Relation to Imposition of SanctionsI. Other Enforcement ActionJ. Future Compliance/Deterrence EffectK. Other Relevant Factors on a Case-by-Case Basis
  • 36. Enforcement – Action Types Criminal Referral Civil Penalty Finding of Violation Cautionary Letter NoAction Violations may also result in: • Blocked funds & Seized Goods • License Revocation • Negative Publicity, Loss of Business
  • 37. Base Penalty Calculation 37
  • 38. Penalty Amounts• The base penalty amount may be adjusted to reflect applicable General Factors. Aggravating• Each factor may be mitigating or aggravating, resulting in a lower or higher proposed penalty amount. Mitigating• Neither the Base Penalty nor the Proposed Penalty will exceed the applicable statutory maximum amount.
  • 39. License Applications• Fax and email applications are generally NOT accepted.• Please note that the Licensing Division generally does NOT answer hypothetical questions.• OFAC Licensing: Hotline: 202-622-2480 Address: OFAC Licensing Treasury Annex Building 1500 Pennsylvania Ave, NW Washington, DC. 20220
  • 40. How OFAC can help prevent violations • OFAC provides guidance to financial institutions, importers/exporters, other industry groups, and individuals through: Written Telephone E- Public guidance Hotline Hotline Presentations
  • 41. Treasury’s Website for OFAC
  • 42. Contact Information OFAC Compliance Hotline: 202-622-2490 or 1-800-540-6322 OFAC Licensing Division 202-622-2480 OFAC Licensing Division 1500 Pennsylvania Avenue NW - Annex Washington, DC 20220
  • 43. Common Challenges in Sanctions ManagementSWIFT Operations Forum - AmericasMarch 2013
  • 44. List Management Challenges a. Ensuring that products/platforms collect required data for scanning b. Applying the correct list(s) to particular customers/transactions in multiple jurisdictions c. Frequency of list and program updates  i. In 2012, OFAC updated its programs, on average, every 3 days  ii. In 2012, there were 7 instances where OFAC updated multiple times intra-day (includes both list and program changes)  iii. Cascades of updates, for example, when OFAC additions are picked up by HMT, then EU. d. Overall list volume (OFAC; for example, 5074 entities, 6878 aliases, and 8918 addresses and growing) 44
  • 45. List Content Challenges a.Indirect listings (or, listings that require the institution to do additional research in order to implement) For example:  i. Listing of Tidewater required research into the specific ports which they operated (Amir Abad, Assaluye, Anzali, Bandar Abbas, BIK, Busher, Chabahar, Khark Island, Khoramshahr, Mahshahr, Neka, and, Noshahr), as well as their vessel operations in Azerbaijan and Nigeria  ii. Listings that include “all other branches or offices worldwide”  iii. Companies in which a listed entity has more than 50% interest.  iv. Aircraft Listings (Tip: the first part of the registration gives the country of original registration. The current listings contain; EK (Armenia), EP (Iran), EX (Kyrgyzstan), F (France), and UR (Ukraine))  v. Listed vessels changing names, countries of registration, ownership, management (Question; Bolivia, Moldova, and Mongolia have each registered Iranian vessels at some time. What do they have in common?) 45
  • 46. Iran’s Phantom Flotilla Vessels Without a Real CountryVessel Name IMO Category Vessel Name IMO CategoryAttar 9074092 General Cargo HUWAYZEH 9212888 Tanker VLCCCamellia 9171462 Crude Oil Tanker JUPITER 9187631 Crude Oil TankerCARMELA 9193185 Bulk Carrier Lantana 9172040 Crude Oil TankerChastity 9386500 General Cargo Magnolia 9172052 Crude Oil TankerClove 9171450 Crude Oil Tanker Pioneer 9362073 Crude Oil TankerCompanion 9357717 Crude Oil Tanker Sattar 9040479 General CargoCourage 9357389 Crude Oil Tanker Shaadi 9405978 Bulk CarrierDaisy 9172038 Crude Oil Tanker Sinin 9274941 General CargoDAMAVAND 9218478 Tanker VLCC Sonata 9569633 Crude Oil TankerDARAB 9218492 Tanker VLCC Songbird 9569645 Crude Oil TankerDAYLAM 9218466 Tanker VLCC Sunrise 9615092 LPG TankerDELVAR 9218454 Tanker VLCC Teen 9101649 General CargoDENA 9218480 Tanker VLCC Tongham 9305219 General CargoFreedom 9357406 Crude Oil Tanker Uppercourt 9305207 General Cargo Valor 9212917 Crude Oil Tanker 46
  • 47. List Content Challenges b. Inconsistent listings (across lists)  i. There are 112 spelling variations in Muammar Kaddafi’s name in print media  ii. The OFAC list provides 8 of them.  iii. The UN sanction uses only 1 form of the name.  iv. The form used in the UN sanction does not match any of the 8 in the OFAC listing. Qaddafi, Muammar Moamar El Kadhafi Muammar Kaddafi Muamar Gaddafi Al-Gathafi, Muammar Moamar Gaddafi Muammar Khaddafi Muammar Al Ghaddafi al-Qadhafi, Muammar Moamer El Kazzafi Muammar Qadafi Muammar Al Qaddafi Al Qathafi, Muammar Moammar el-Gadhafi Muammar Qaddafi Muammar Al Qaddafi Al Qathafi, Muammar Moammar El Kadhafi Muammar Qadhafi Muammar El Qaddafi El Gaddafi, Moamar Moammar Gadhafi Muammar Qadhdhafi Muammar Gadaffi El Kadhafi, Moammar Moammar Kadhafi Muammar Quathafi Muammar Gadafy El Kazzafi, Moamer Moammar Khadafy Mulazim Awwal Muammar Muammar Gaddhafi El Qathafi, MuAmmar Moammar Qudhafi Muhammad Abu Minyar al-Qadhafi Muammar Gadhafi Gadafi, Muammar Mu`amar al-Kadafi Qadafi, Muammar Muammar Ghadaffi Gaddafi, Moamar Muamar al-Kadafi Qadhafi, Muammar Muammar Qadthafi Gadhafi, Moammar Muamar Al-Kaddafi Qadhdhāfī, Mu`ammar Muammar al Gaddafi Gathafi, Muammar Muamar Kaddafi Qathafi, MuAmmar el Muammar el Gaddafy Ghadafi, Muammar Muamer Gadafi Quathafi, Muammar Muammar el Gaddafi Ghaddafi, Muammar Muammar Al-Gathafi Qudhafi, Moammar Muammar el Qaddafi Ghaddafy, Muammar Muammar al-Khaddafi Moamar AI Kadafi Muammer Gadaffi Gheddafi, Muammar Muammar al-Qadafi Maummar Gaddafi Muammer Gaddafi Gheddafi, Muhammar Muammar al-Qaddafi Moamar Gadhafi Mummar Gaddafi Kadaffi, Momar Muammar al-Qadhafi Moamer Gaddafi Omar Al Qathafi Kadafi, Mu`amar al- Muammar al-Qadhdhafi Moamer Kadhafi Omar Mouammer Al Gaddafi Kaddafi, Muamar Mu`ammar al-Qadhdhāfī Moamma Gaddafi Omar Muammar Al Ghaddafi Kaddafi, Muammar Muammar Al Qathafi Moammar Gaddafi Omar Muammar Al Qaddafi Kadhafi, Moammar Muammar Al Qathafi Moammar Gadhafi Omar Muammar Al Qathafi Kadhafi, Mouammar Muammar Gadafi Moammar Ghadafi Omar Muammar Gaddafi Kazzafi, Moammar Muammar Gaddafi Moammar Khadaffy Omar Muammar Ghaddafi Khadafy, Moammar Muammar Ghadafi Moammar Khaddafi Omar al Ghaddafi Khaddafi, Muammar Muammar Ghaddafi Moammar el Gadhafi Moamar al-Gaddafi Muammar Ghaddafy Moammer Gaddafi Moamar el Gaddafi Muammar Gheddafi Mouammer al Gaddafi 47
  • 48. List Content Challenges Limited overlap among lists. Graph courtesy of Omnicision 48
  • 49. Understanding Software Capabilities How might your software handle the following variations on the SDN “Daytona Pools, Inc.”?  Daytona Pools  Daytona Pools Incorporated  DaytonaPools  Daytona*Pools  Daytona P001s  Dayton A Pools  Dayton Pool Inc.  Daytona Pools & Company Do you test the match quality of your software periodically? For example, after vendor updates. 49
  • 50. QUESTIONS? If any questions arise, please contact: Scott Kinney, Compliance Manager at
  • 51. Thank youSWIFT Operations Forum Americas - March 5, 2013 51
  • 52. Please provide us with your feedback!• Kindly complete the survey form and submit upon exitingSWIFT Operations Forum Americas - March 5, 2013 52
  • 53. What’s next on the agenda SWIFT Operations Forum Americas - March 5, 2013 53
  • 54. What’s next on the agenda SWIFT Operations Forum Americas - March 5, 2013 54
  • 55. Lunch in Plenary SWIFT Operations Forum Americas - March 5, 2013 55