The Role Of OFAC In Enforcing Sanctions

Editor: You have had a very interesting background in both government and private industry. When you were in government, you were Deputy Chief Counsel at the U.S. Treasury Department in the Office of Foreign Assets Control (OFAC). What was the scope of your duties?

Moe: While at OFAC, I was in the Chief Counsel’s Office, which at the time was considerably smaller than today, with about five attorneys managing the legal work related to all of the sanctions programs then in effect. One of the programs for which I had responsibility was the Cuban sanctions program, not only one of the oldest of the sanctions programs, but also one of the most complex. The Cuban Embargo and the sanctions regulations relating to it prohibit transactions with the Cuban government and also Cuban nationals, wherever they may be. As a result, it often reaches deeply into very personal transactions of individuals – a Cuban national who has taken up residence outside of Cuba is still subject to the prohibitions contained in the Cuban sanctions regulations. As a result, transactions that appear to have nothing at all to do with Cuba come within the snare of the prohibitions. Because we have such a large Cuban-American population, many of whom maintain family ties to relatives in Cuba, the regulations under the Cuban sanctions affect those relationships. Such matters as traveling to visit family, sending money to a family member in Cuba, or settling an estate when a grandchild remains in Cuba – i.e., whether that grandchild can inherit property – are all subject to the regulations administered by OFAC and are the kinds of legal questions that would come to the Office of the Chief Counsel at OFAC.

In addition, I worked on other programs, including the 1995 expansion of sanctions against Iran, as well as the Iraq sanctions program put in place in 1990 when Iraq invaded Kuwait – far and away, one of the most novel programs that I worked on. While one thinks of sanctions as being purely punitive, the sanctions put in place with regard to Kuwaiti assets were done largely to protect Kuwaiti assets from misuse by Iraq. This presented an opportunity for coordination with the Kuwaiti government as they sought to protect their state’s assets. Using sanctions as a protective tool is something that the U.S. had done during World War II to protect European assets from exploitation by the Nazis, and to an extent the most recent Libya sanctions protected the assets of the Libyan people.

Editor: Restrictions on Cuba seem to have been modified, particularly since Raúl Castro assumed control.

Moe: It is important to note that economic sanctions are constantly changing. These regulations are always a product of foreign policy, so as policy changes – as the government seeks to give incentives to a targeted government or to bring pressure on a government – the sanctions either relax or tighten. Travel to Cuba is one area where there has been expansion and contraction as policy changed. There has been a long tradition of permitting Cuban Americans to visit close family members, as well as provisions allowing journalists and those who worked for international organizations to freely travel to Cuba. Under the Obama administration, new licensing policies allow groups such as universities, museums and others to organize travel to Cuba under guidelines approved by the U.S. Treasury Department. Reaching out to the Cuban people through this licensed travel is consistent with U.S. foreign policy, as is reflected in the OFAC regulation.

Editor: How did your work as General Counsel, Economic Sanctions and Managing Director at Citigroup differ from your work in government?

Moe: Citi hired me from Treasury because it needed someone with expertise in economic sanctions. Economic sanctions are particularly important to banks because sanctions, among other things, are about the movement of money and preventing it from reaching the wrong recipients or the wrong countries. It is critically important that banks, particularly global banks, be very sensitive to the movement of money across borders. The questions I fielded at the Treasury Department were very much the same as those from bankers at Citi. The Treasury Department provided informal advice on dealing with economic sanctions issues, and those questions often came from banks insofar as they would seek guidance as to whether a transaction was running afoul of some provision of OFAC’s regulations. A great deal of back and forth between OFAC and the banks occurred as to whether a given transaction violated the sanctions or whether a license was needed to provide a financial service. One of the most challenging matters I faced almost immediately after arriving related to Citi’s branch in Sudan, which had been there for 25 years. In 1997, economic sanctions were imposed on the government of Sudan. Naturally, a bank situated in the capital, Khartoum, had many transactions with the government, such as various taxes as well as accounts on behalf of many governmental entities. Our office was in close contact with the Treasury Department regarding that bank, which ultimately we were forced to close in light of all the restrictions we had to comply with. Citi operated in over 100 countries, and issues related to economic sanctions arose in nearly every jurisdiction.

Editor: How does the program of U.S. economic sanctions administered by BIS (Bureau of Industry and Security) under the Commerce Department overlap with that of OFAC?

Moe: All government agencies that oversee economic sanctions for export control coordinate closely to ensure that they are engaging in actions that are consistent with the executive branch’s established policy. As to which agency does what depends on the individual program. For instance, regarding Cuba, there’s a provision that if the Commerce Department authorizes an export to Cuba, that authorization covers any dealings you may have with OFAC – effectively, one-stop shopping for the exporter. OFAC would pick up related aspects of the export – if there was travel related to the export or anything that didn’t involve the actual export. There is close coordination between the two agencies with BIS taking the lead on export control in the case of Cuba.

However, under the Iran sanctions program from 1995 and greatly expanded today, it was established that OFAC would take the lead on all licensing of exports to Iran rather than BIS. Often the reason for the distinction in giving responsibility to OFAC is that there are fewer exports to be sanctioned. However, while expertise on exports rests in BIS, there’s a very healthy dialogue between BIS, OFAC and State as to what types of transactions should be approved.

Editor: Please tell our readers about OFAC’s issuance this July of new general licenses authorizing investment in Burma. What restrictions still remain?

Moe: Sanctions are easy to impose but difficult to remove. The Burma sanctions go back to 1997 and expanded dramatically in 2003 with a ban on exportation of financial services, an area I focused on at Citi. Effectively, U.S. financial institutions were no longer allowed to provide any financial services to Burma. What we see in the two general licenses recently issued is the first rolling back of those sanctions in light of the significant changes occurring in Burma. The U.S.’s cautious rolling back is in contrast with a complete lifting of the Burma sanctions by the EU. For example, while you can now invest in Burma under the new license, the ability to export your product to the United States is still curtailed. The U.S. government is interested in monitoring investments very closely. Once your investment reaches $500,000, you are obligated to file a very extensive report with the State Department detailing exactly what your investments are and who your Burmese partners are. There remain concerns about corruption in Burma, probably one reason for close U.S. government monitoring.

There are U.S. companies that will cautiously reenter that market; however, maintaining a careful eye on the value of any investment is going to be important because it will trigger an obligation to report to the State Department as well as satisfy a related public reporting requirement. There are numerous unanswered questions also as to how you value an investment. For instance, if you open an office in Burma, is it the entire value of the rental contract or only the monthly charge? If you hire Burmese employees – considered development of human resources in Burma – how do you value that expenditure? There are many unanswered questions regarding what is required for reporting, and many interest groups will follow closely what U.S. companies are doing in Burma.

The other general license is a little clearer. It authorizes the exportation of financial services, curtailed in 2003 but now permitted. Banks are permitted to enter Burma to provide financial services to people in Burma, an important factor for anyone setting up a new office. If a company is setting up an office, it likely will want its bank to provide a line of credit. This raises a further question about the reporting requirement. The State Department has indicated a willingness to provide guidance on these matters, but we’re just on the cusp of seeing how this will play out as people contemplate investment in Burma.

Editor: Please give some examples of when companies have received heavy penalties from OFAC.

Moe: OFAC makes these matters very public, listing enforcement actions on their website and in some cases providing penalty notices. Quite often the large penalties that OFAC has issued in the last five or six years have involved joint enforcement actions with others – federal and state bank regulators, the Justice Department and New York State Attorney General – and a number of those actions have been taken under the Iran program against foreign banks for engaging in a practice called “stripping,” i.e., sending payments to the United States after removing identifying information that might show the participation of an entity that was subject to economic sanctions. Since the early ’90s, U.S. banks have set up filters to ensure that as payments come through the United States, the payment instruction would go through a software filter to detect any relation to a sanctioned party, resulting in stopping the payment for review. Having identified the payment, the U.S. bank would either reject the payment, cancel it or take the money associated with the payment and place it in a blocked account. The intended beneficiary could not have access to that money unless the Treasury Department gave separate approval for its release. A number of foreign banks disclosed that they were engaging in the practice of stripping information from payment instructions to avoid detection by software filters. Those disclosures led to coordinated enforcement actions by the state and federal regulators.

Editor: How should U.S. financial institutions set up their training programs to work in compliance with OFAC regulations?

Moe: Economic sanctions regulations change all the time, and compliance programs should not be allowed to become stale. Decision makers, even at the lowest level of the organization, should understand the law as well as a bank’s own internal policy and what their responsibilities are with regard to payments they are processing. Banks typically establish a triage-type system so that analysts release a payment quickly for an innocent person’s having an address on “Teheran Street.” However, there are other more challenging transactions where there may merely be an unclear reference in an informational field that calls for a dialogue with the bank that initiated the payment. It may require involving the Treasury Department. While the larger banks cannot call Treasury every time a questionable payment arises, a well-trained compliance staff learns to deal with these matters internally and limits the number of calls they have to make to the government.

Editor: How do U.S. companies stay abreast of OFAC regulations? What sources should they rely upon?