Banks' skirting of U.S. sanctions under scrutiny

Posted on Fri, Sep. 22, 2006

OBSERVER EXCLUSIVE
Banks' skirting of U.S. sanctions under scrutiny
Financial firms fined most often since '03; many called accidental
RICK ROTHACKER
rrothacker@charlotteobserver.com

Bank accounts for customers in Iran. Lease agreements in Cuba. Money
transfers for Libyans.

Big banks violated U.S. sanctions against doing business in countries
such as Iran and Cuba more often than any other type of company, an
Observer analysis of U.S. Treasury Department fines since 2003 has found.

Three banks racked up six penalties each over the span, the most of any
firm. Charlotte's Bank of America Corp. and Wachovia Corp. also paid
multiple fines.

The relationships banks forge with international partners were in the
spotlight this summer when Wachovia ended ties to a bank that reportedly
had connections with terrorist organization Hezbollah. And this month,
Treasury took steps to further isolate an Iranian bank from the U.S.
financial system.

The Observer analyzed nearly 400 penalties disclosed since March 2003,
when the government began publicly posting the violations online.

Most companies aren't trying to do business with designated terror
states or drug traffickers, and violations are mainly accidental,
Treasury and bank officials say. Still, critics are concerned about
banks' ties to shady customers.

"There needs to be a much greater commitment to hold these international
financial institutions accountable for their dealings with some of the
most corrupt elements in the world," U.S. Rep. Dana Rohrabacher,
R-Calif., who chaired a hearing on terrorist financing this year, said
in a statement to the Observer.

The Office of Foreign Assets Control, or OFAC, part of the Treasury
Department, enforces U.S. sanctions and embargoes imposed against
countries known for ties to terrorism, weapons proliferation, human
rights violations and other disputes with the U.S. The agency also
maintains a list of banned individuals and entities.

Over the three-plus years, financial institutions accounted for about
one-third of the total penalties and 90 percent of all fines, including
a $40 million penalty against Dutch Bank ABN AMRO Holding NV. The
nonbank violators ranged from large companies such as General Electric
Co. to small import-export firms to the New York Yankees for a Cuban
contract.

The violations included dealings ranging from money transfers to banned
travel as far back as the mid-1990s.

Overall, the number of violations -- by banks and other companies --
declined sharply over the three-plus year period analyzed by the
Observer. This year, OFAC meted out 10 violations totaling $309,404
through August, compared with 158 for $2.7 million in 2003, the analysis
found.

Treasury Department spokeswoman Molly Millerwise attributed the drop in
penalties to increased vigilance by companies since 9-11. The department
this year also ramped up a program that considers a bank's overall
compliance efforts and past violations before assessing fines, she said.

"We want to make sure the activities are true violations," she said.

Banks are frequently flagged by OFAC because of the large volume and
global nature of their transactions, said Andrew Davenport, vice
president of Conflict Securities Advisory Group. The Washington-based
research firm advises companies on the risks of doing business in
countries with terrorism ties. Many of the violations result from
oversights and errors in systems used to screen transactions, he said.

In public comments filed this year with OFAC, banks lauded the new
approach to assessing violations at an agency that has faced criticism
for a lack of transparency. Rohrabacher, however, is skeptical about the
decline in penalties.

"A reduction in fines is not necessarily reflective of positive
progress," he said.

4 violations for BofA

Of all companies, Citigroup, Bank of New York Co. and HSBC Holdings Plc
paid the most penalties, each landing six fines over the three-plus year
span. The violations ranged from funds transfers in violation of Libyan
sanctions to operating accounts in the Balkans.Spokespersons for HSBC
and Citigroup said the banks have stringent programs for complying with
OFAC regulations. Neither bank has had an infraction since 2004. A
spokesman for Bank of New York, which paid two penalties last year,
declined comment.

Among Charlotte's big banks, Bank of America paid four penalties between
2003 and 2005, totaling about $183,000 in fines.

The bank's biggest fine came in 2003, when it paid $162,346 -- the fifth
biggest of any company -- for violations of sanctions against Iran.
According to OFAC, the bank had handled funds transfers between 1999 and
2000 and accounts between 1995 and 2000.

The U.S. has had strained relations with Iran since 1979, when students
took American Embassy personnel hostage. Through a series of executive
orders, U.S. presidents have prohibited virtually all trade and
investment with the country, citing its sponsorship of terrorism and
pursuit of weapons of mass destruction.

Bank of America spokeswoman Shirley Norton said the bank reached a
voluntary settlement after several inadvertent violations. She said the
bank couldn't disclose details for privacy reasons, but that the
violations did not involve terrorism or drug trafficking.

The bank operates a state-of-the-art compliance program that has
successfully blocked transactions and accounts totaling tens of millions
of dollars, Norton said. "While our OFAC compliance program is highly
effective, we handle many millions of international transactions and
occasionally an inadvertent or systems error occurs," she said.

In public comments to OFAC this year, the bank praised the agency's new
approach to evaluating violations. "In the past, the imposition of
penalties by OFAC have appeared to have an inconsistent consideration of
an institution's history," associate general counsel David Miller wrote.

3 penalties for Wachovia

Wachovia paid three penalties between 2004 and 2005 for a total of about
$35,000 in fines. The violations included the operation of accounts and
funds transfers in violation of sanctions against Iran and Libya between
2000 and 2002.

President Bush in 2004 lifted sanctions against Libya after the country
promised to dismantle its nuclear-weapons program.

Wachovia has comprehensive policies and procedures, including extensive
staff training and software filters, to ensure the company complies with
OFAC regulations, spokeswoman Elizabeth Pollet said.

"Wachovia is committed to compliance with all applicable laws and works
closely with OFAC," she said, declining to comment on specific violations.

OFAC started disclosing limited information about penalties on its Web
site in 2003, and in the past year began posting more details. The
Observer filed a Freedom of Information Act request in August for more
information about some Bank of America and Wachovia cases, but the
Treasury Department said it has a backlog of requests and has not yet
complied.

Wachovia in recent years has been expanding its correspondent banking
operations, which process U.S. dollar transactions for other foreign
banks. Last year, the bank acquired the correspondent banking business
of San Francisco-based Union Bank of California, which paid four
penalties for a total of about $37,000 between 2003 and 2005.

Pollet said the bank extensively researches acquisitions, but declined
comment on the violations.

The bank faced controversy in July when NBC News reported that Wachovia
had a relationship with a bank in Lebanon that Israel contended was
helping finance Hezbollah's attacks on the Jewish state. After being
contacted by the network, Wachovia ended the correspondent banking
relationship with Middle East and Africa Bank.

That bank is not on the list of banned organizations maintained by OFAC
and the U.S. government has no sanctions program against Lebanon.

Ongoing focus

In March, Rohrabacher held a hearing on international banking
institutions and alleged connections to corruption and the war on
terrorism. One of the focuses was Swiss bank UBS, which the Federal
Reserve fined $100 million in 2004 for allegedly sending U.S. dollars to
Cuba, Libya, Iran and the former Yugoslavia in violation of U.S.
sanctions.The bank was fined by the Fed, not OFAC, because it operated a
trading center on behalf of the Federal Reserve Bank of New York. It
wasn't supposed to accept or deliver U.S. currency to banks in countries
under sanctions.

If he remains chairman of the House International Relations subcommittee
on Oversight and Investigations after the November election, Rohrabacher
said, he plans to further investigate banks.

Davenport, of Conflict Securities, said he expects the issue to remain
forefront for banks and other companies because of the potential
backlash among customers and investors.

"As the public is more attuned to the risks presented by Iran and other
U.S.-sanctioned states, the reputational risk associated with business
ties to these countries increases," he said.

Most Penalties

Here are the top violators from 2003 through August 2006.

COMPANY PENALTIES
Bank of New York 6
Citigroup 6
HSBC 6
JPMorgan Chase 5
Union Bank of Calif. 4
Deutsche Bank 4
Bank of America 4
American Express 4
Wachovia 3

Top 5 OFAC Fines

Largest fines levied from 2003 through August 2006.

COMPANY FINE YEAR
ABN AMRO* $40 million 2005
Zim American Israeli Shipping $250,000 2003
IGI (cosmetics) $225,000 2003
Chiron (health care) $168,500 2004
Bank of America $162,346 2003

*Fine involved other U.S. regulators.

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