ENFORCEMENT INFORMATION FOR June 28, 2013
Intesa Sanpaolo S.p.A. Settles Potential Civil Liability for Apparent Violations of Multiple Sanctions Programs: Intesa Sanpaolo S.p.A. ("Intesa") has agreed to remit $2,949,030 to settle potential civil liability for apparent violations of the Cuban Assets Control Regulations ("CACR"), 31 C.F.R. part 515; the Sudanese Sanctions Regulations ("SSR"), 31 C.F.R. part 538; and the Iranian Transactions Regulations ("ITR"), 31 C.F.R. part 560 [1] The Office of Foreign Assets Control ("OFAC") has determined that Intesa did not voluntarily self-disclose the apparent violations and that the apparent violations constituted a non-egregious case.
As early as the late 1990s, Intesa maintained a customer relationship with Irasco S.r.l. ("Irasco"), an Italian company headquartered in Genoa, Italy that is owned or controlled by the Government of Iran ("GOI"). Despite Irasco’s ownership and line of business as an exporter of goods to Iran, and its financial and commercial associations with Iranian state-owned financial institutions, companies, and projects, Intesa failed to identify Irasco as meeting the definition of the GOI in the ITR and, at the time of the apparent violations, did not take appropriate measures to prevent the bank from processing transactions for or on behalf of Irasco that terminated in the United States and/or with U.S. persons. Intesa’s payment instructions for these transactions all identified Irasco as the ordering customer.
Separately, Intesa processed approximately 120 transactions to or through the United States that involved Cuba or Sudan. Intesa does not appear to have implemented or utilized special procedures or payment practices in order to process these payments to or through the United States.
Intesa processed 53 wire transfers totaling approximately $1,643,326 between October 29, 2004, and March 12, 2008, involving Cuba in apparent violation of the CACR. The base penalty amount for this set of apparent violations was $1,867,000. Intesa processed 31 wire transfers for Irasco totaling $3,142,565 between November 1, 2004, and December 8, 2006, in apparent violation of the ITR. The total base penalty for this set of apparent violations was $3,371,000. Intesa processed 67 funds transfers involving Sudan totaling $2,858,065 between November 4, 2004, and October 29, 2007, in apparent violation of the SSR. The total base penalty for this set of apparent violations was $4,124,000.
The total base penalty amount for the apparent violations was $9,362,000. The settlement amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A: Intesa had reason to know that one of its customers met the definition of the GOI in the ITR and that payments which terminated in the United States for this customer constituted apparent violations of the ITR; Intesa’s conduct resulted in harm to the integrity of U.S. economic sanctions programs; Intesa is a commercially sophisticated international financial institution; and Intesa did not, at the time of the apparent violations, maintain an adequate program to ensure that it was in compliance with U.S. economic sanctions. Substantial mitigation was provided to Intesa due to the following factors: OFAC concluded that the apparent violations did not constitute a willful or reckless violation of the law; OFAC also determined that no Intesa managers or supervisors had actual knowledge or awareness of these matters within the meaning of the Guidelines; Intesa provided substantial cooperation to OFAC, including signing a tolling agreement and multiple extensions; Intesa took remedial action in response to the apparent violations and now has a more robust compliance program in place; and Intesa has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transactions giving rise to the apparent violations.
[1] Please note that on October 22, 2012, the ITR were renamed the Iranian Transactions and Sanctions Regulations and were reissued in their entirety.
1) Prior to the 2013 issue of EO 13599 (blocking all property and interests in property of the Government of Iran), Irasco was not a blocked party. Nevertheless, the sanctions in place at the time were such that the Government of Iran and all entities owned or controlled by the Government of Iran were ineligible to receive services from the U.S (560.410(b)). The Italian company "caused" an export of financial services to Italy, but where OFAC also considers that export of financial services to have reached Iran given that "the benefit of services performed anywhere in the world on behalf of the Government of Iran is presumed to be received in Iran" (560.410(b)). OFAC considers money transfers for the direct or indirect benefit of an Iranian entity, including the GOI, to fall within the scope of 560.204/560.410.
"The term Government of Iran includes (a) The state and the Government of Iran, as well as any political subdivision, agency, or instrumentality thereof; (b) Any entity owned or controlled directly or indirectly by the foregoing." This is an example of an "indirect" export of services to Iran.
Legally speaking, then, the theory of liability is unusually convoluted as Intesa Sanpaolo "caused" a U.S. person to indirectly export a financial service "to Iran," by causing a transfer to an entity in Italy owned by the GOI.
2) Intesa Sanpaolo was fined nearly $240m by New York regulators for, among other issues, sanctions violations not addressed by OFAC. Many of the violations cited, however, appear to have been likely permissible pursuant to the then-in-force U-turn general license for Iran.
See https://www.acfcs.org/news/323529/New-York-regulator-penalizes-Italian-bank-nearly-240-million-on-alert-failures-cavalier-attitude.htm
3) Diligence expectations related to dealings with entities that are blocked for being "controlled" by the Government of Iran:
It is prohibited for U.S. persons to export services to Iran where they have a "reason to know" about the destination of such services. Having a "reason to know" about a specific fact or circumstance is, in turn, interpreted to turn on the question of whether a person subject to sanctions prohibitions did or did not meet OFAC's due diligence expectations, given the facts and circumstances. See General Note on the terms "knowingly," "should have known" and "reason to know" in the Primary Sanctions, Secondary Sanctions and Derivative Designation Contexts (System Ed. Note). When this case is read in conjunction with Intesa Sanpaolo S.p.A. (2013) (penalizing an Italian bank for routing USD payments through the U.S. for an entity meeting the definition of "Government of Iran"), one has a better sense of where the line is for having a "reason to know" that a given entity meets the definition of "Government of Iran." In Intesa Sanpaolo, OFAC fined a non-U.S. bank for having "failed to identify [a private Italian entity called] Irasco as meeting the definition of the GOI" in a situation where OFAC considered that the bank should have known about the GOI connection. In that case, the red flags identified by OFAC were the ostensibly private Italian entity’s "ownership and line of business as an exporter of goods to Iran, and its financial and commercial associations with Iranian state-owned financial institutions, companies, and projects."
In United States v. Alavi Found., in contrast, there was a situation where U.S. person entities had been operating in the United States for about 13 years before the U.S. government determined that they were indirectly "controlled" by the Government of Iran. In that case, the entities and persons linked to the GOI had gone to great lengths to conceal the fact that they were operating on behalf of the Iranian Government. Given that no publicly announced enforcement actions were issued in connection with that case, and that hundreds of U.S. person entities, including banks and commercial tenants, had technically "exported services" to Iran by dealing with the GOI-controlled U.S. person entities, it is probably safe to assume that OFAC did not consider any U.S. person counterparty to transactions with the GOI-controlled U.S. entities to have had a "reason to know" about such GOI control. It is possible that OFAC had issued cautionary letters and/or findings of violations in connection with such dealings, but there were no actual penalties issued.