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Doing Business In... The USA's sanctions policy has much wider application than just banks

Nigel Morris-Cotterill

The news headlines scream about attacks on UK banks by the USA's law enforcement agencies and regulators enforcing the USA's sanctions policies. But while the focus of attention has been on Standard Chartered, HSBC and others, there is a much bigger pool of targets. Any business that has any form of footprint in the USA, or which transacts in US dollars, faces risks that are similar to those so heavily publicised in relation to banks. Nigel Morris-Cotterill, Head, The Anti Money Laundering Network, explains how this affects businesses all over the world.

The USA's sanctions regime is simultaneously complex and simple. There are dozens of ways that a country, company, individual, organisation or, even, individual assets can be made subject to sanctions.

But there is a single point of reference, a composite list maintained by The Office of Foreign Asset Control, a division of the US Treasury.

The OFAC list, as it is known, contains many thousands of entries and it is added to or modified, including deletions, with great frequency.

It doesn't matter, in the real world, whether you, as a manager or as an individual, agree with the sanctions. There are only two criteria to consider:

1) are you or your company a US citizen, registered to do business in the USA or have any physical presence in the USA?

2) regardless of the answer to 1) do you do business, anywhere in the world, which is denominated in US dollars where that business is transacted through one or more banks?

If so, then US sanctions laws apply to you, your company and/or that transaction.

The USA claims jurisdiction over its currency, wherever it is used. But practically, it cannot enforce that jurisdiction over cash. However, because of the mechanisms by which international banking works it has, since the 1970s, been able to enforce its jurisdiction over inter-bank transactions.

The system is known as "correspondent banking" and it works because banking is subject to the (these days fiction) that someone, somewhere, holds the money or an asset to secure it (historically, gold). Retail banking is a simple business: a bank holds (for example) a stack of banknotes for one customer and a stack of banknotes for another and keeps a record of transactions and balances. When A wants to pay B he issues an instruction - a cheque or, more likely these days, an electronic order - to the bank to transfer the correct value from his stack of banknotes to that of B.

Now that there isn't any actual money, the value for governments is not in the cash itself but in the information services that surround it. Who is making deposits, who is making withdrawals, why, how much, where and who are payments being made to, how long is money hanging around in an account instead of being put to work?

Because, as a matter of US law (it is the only country to claim this) all US dollars held in the banking system are held in the USA, and because clearing (a hang-over from the days when inter-bank transfers were settled in cash) takes place in Manhattan, that gives jurisdiction to the authorities and courts in that district, in New York city and in New York state as well as (because there are international aspects or, even, inter-state aspects) federal enforcement agencies and regulators.

It is those information flows that interest the USA's sanctions enforcers. Through the information that is attached to every inter-bank transfer made in US dollars anywhere in the world, the US Treasury is able to trace the payer, payee and purpose of each and every one of those transactions.

But the US Treasury does not itself scrutinise every transaction: that is done by the banks which provide the "correspondent banking" services to both US regional banks and to foreign banks. If they know or suspect that any aspect of the transaction data relates to a sanctioned country, individual, entity or asset, they must immediately report the transaction to the US Treasury and, in many cases, immediately freeze any asset over which they have control. If they fail to do so, they face substantial penalties.

US banks are also required to report suspicions that documentation may have been altered or drafted in such a way as to hide the true nature of the transaction or any of the parties involved.

Every bank transfer in US dollars is screened against the OFAC list.

The range of targets under US sanctions is immense. The motivation for the USA's actions is not, in the real world, relevant. Within its own borders, any country can pass, implement and enforce any laws it likes. That is a basic tenet of the sovereignty of nations. And so, whether you agree with the USA's stance on Iran, for example, is irrelevant. The USA's sanctions are frequently political, dressed up as matters of national security. The USA has, for example, long harboured resentment against both Cuba and Iran as a result of nationalisation of US assets during revolutions.

It doesn't matter that the sanctions have absolutely nothing to do with anyone else anywhere in the world. It doesn't matter if your country actively encourages transactions with some of those that, for its own purposes, the USA wants to lock out of international commerce.

The USA's sanctions policy applies outside the national security and political arenas: it also applies to what the USA terms "Drugs Kingpins" - under the so-called "Kingpin Act," the USA designated those that it considers to be major players in the drugs trade both domestic and foreign. For example, one of the groups targeted is Los Zetas, a Mexican drugs trafficking gang. They are known to be exceptionally violent and have taken control of parts of the area close to Mexico's border with the USA. Los Zetas has deep links within certain parts of the USA. It is, ultimately, controlled by Miguel Angel Trevino Morales and Omar Trevino Morales who have also been designated under the Kingpin Act. The USA says that Mexican businessman Francisco Antonio Colorado Cessa is closely connected. In June 2012, he was designated as a result of what the USA says is providing material support to Low Zetas. Today, 30 August 2012, Cessa's company ADT Petroservicios, S.A. De C.V. was designated. It is an oil services company with international operations. As a result, it is now an offence under US law for anyone to whom the sanctions laws apply to have any financial dealings with that company.

The simple facts are these:

1. If you have any physical or legal footprint in the USA, you must comply with US sanctions law

2. If you transact in US dollars which are transferred inter-bank, you must comply with US sanctions law

And if you don't, by a somewhat convoluted route, your assets which are held in US dollars in any bank worldwide can be frozen and, if you travel to a US friendly country or travel on a US airline, if the USA wants to prosecute you, as an individual, it can (and in many cases has) arrange for your arrest and extradition to the USA to face charges.

The consequences are severe: penalties for breaches of the Kingpin Act range from civil penalties of up to USD1.075 million per breach to more severe criminal penalties. Criminal penalties for corporate officers may include up to 30 years in prison and fines up to USD5 million. Criminal fines for corporations may reach USD10 million. Other individuals face up to 10 years in prison and fines pursuant to Title 18 of the United States Code for criminal breaches of the Kingpin Act.


Nigel Morris-Cotterill is Head, The Anti Money Laundering Network, ultimate parent of this newspaper.

Our sister company, The Financial Crime Forum will host a series of seminars in September 2012 on how the USA applies its sanctions regime across the world and the legal and regulatory risks that businesses face. The seminars in Hong Kong, Singapore, Dubai and London are called "The USA (and its states) v The World's Banks (and other financial institutions).