Sanctions Update: Bank of Tokyo Mitsubishi Penalized and OFAC FAQ Addresses Russian Shale Oil Production
On November 19, 2014, the New York Department of Financial Services ("DFS") announced an enforcement action that included a penalty of $315 million against the Bank of Tokyo Mitsubishi UFJ ("BTMU") in connection with allegations that the bank misled regulators about transactions with Iran, Sudan and other parties subject to U.S. sanctions. Specifically, the allegations concerned efforts by the bank's compliance personnel and other employees to pressure PricewaterhouseCoopers into removing key language from a report to the DFS.
Among the red flags withheld from regulators was a reference to a written policy allegedly instructing employees to strip and/or falsely populate SWIFT data fields in order to bypass OFAC filters in New York. As described in the Consent Order signed by BTMU, in March 2007, the bank hired PwC to review international remittance and trade finance activity and to present key findings to regulators. During a May 2008 meeting with regulators, the bank denied that it had a policy of "scrubbing" wire messages for information that might trigger screening alerts for potential sanctions violations, yet PwC learned later that month that such instructions were in fact included in one of the bank's written procedures for foreign transfers.
Initially, the PwC engagement team included in its draft report a reference to the impact that prior knowledge of these "special instructions" would have had on its methodology, and cautioned that subsequent investigations into the possible existence of other special instructions ultimately could call into question the report's findings. However, following objections from the bank's most senior Anti-Money Laundering, Compliance and Legal Division managers, this and other language was removed or altered. In addition, at the request of bank employees, PwC deleted the regulatory term of art "special instructions," and replaced it with a more neutral reference to "written instructions." In the Consent Order, BTMU admitted that, among other violations, it "knowingly made or caused to be made false entries in its books, reports and statements."
In addition to the $315 million penalty against BTMU, the DFS demanded the resignation of Tetsuro Anan, a member of the bank's Anti-Money Laundering, Compliance and Legal Division, and banned two other compliance officers from conducting business with any New York banks that are regulated by the agency. The $315 million penalty is in addition to an earlier $250 million penalty assessed pursuant to an agreement between DFS and BTMU in June 2013, before the regulator learned of the content of PwC's draft report. In August 2014, PwC was fined $25 million in connection with its BTMU report, and was barred for two years from providing new consulting services to financial institutions under New York state supervision.
Ukraine-Related Sanctions – OFAC FAQ
On November 18, 2014, OFAC issued guidance, in the form of Frequently Asked Question ("FAQ") No. 418, with respect to the interpretation of Directive 4 under Executive Order 13662. Directive 4 prohibits the exportation of goods and services or technology in support of exploration or production for Russian deepwater, Arctic offshore, or shale projects that have the potential to produce oil.
FAQ No. 418 covers the interpretation of "shale projects" in Directive 4, explaining that the term applies to "shale projects with the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory." In addition, "[t]he term 'shale projects' applies to projects that have the potential to produce oil from resources located in shale formations." Therefore, OFAC concludes, "as long as the projects in question are neither deepwater nor Arctic offshore projects, the prohibitions in Directive 4 do not apply to exploration or production through shale to locate or extract crude oil (or gas) in reservoirs." The implication of this FAQ is that Directive 4 applies to projects that produce oil from shale formations, rather than projects that produce oil through shale formations (e.g., projects that produce oil from beneath shale formations).
Related news: Sanctions Update (with Turza Comment) (September 22, 2014); Sanctions Update (with Turza Comment) (September 12, 2014).