Combing through SEC disclosures mandated by § 219 of the Iran Threat Reduction and Syria Human Rights Act can be tedious. § 219 requires reporting if “an issuer or an affiliate of the issuer” is in violation of a variety of Iran sanctions provisions. Pursuant to Rule 12-b(2) the of the Securities Exchange Act, the term “affiliate” is defined very broadly, leaving us with a long chain of disclosures where the underlying activity is wholly unrelated to the company issuing the disclosure. But every once and a while, if you’re diligent, there are interesting pieces of information buried within those 20-F annual reports.
Japan’s Sumimoto Mitsui Financial Group’s annual report is one such nugget. According to its 20-F, the company’s banking unit, Sumimoto Mitsui Banking Corporation (“SMBC”) is engaged in settlement talks with OFAC over potential sanctions breaches:
A limited number of the Bank’s potential violations of U.S. economic sanctions were identified and voluntarily disclosed to OFAC. These transactions resulted from inadvertent operational errors or the lack of familiarity of some personnel of the Bank with the requirements of the relevant regulations in the past, or from the inherent limitation on information about underlying transactions that can be obtained in the course of normal banking operations. Since the discovery of these potential violations we have further strengthened our Group-wide OFAC compliance program in an effort to prevent the recurrence of such potential violations. We settled some of the voluntarily disclosed potential violations with OFAC while others remain unsettled. However, in light of the inadvertent nature of such potential violations and the degree to which our strengthened OFAC compliance program aims to mitigate the risk of potential violations, we do not believe that our settlement with OFAC, or any possible penalties that OFAC may impose with respect to the other potential violations that remain unsettled, will have a material impact on our reputation, financial condition or results of operations, or on the prices of our securities.
With regard to the already concluded settlements discussed in SMBC’s report, it’s unclear if they are referring to the 2010 settlement where the bank paid $229,380 for violations of the Sudanese Sanctions Regulations. But it seems likely that additional enforcement from OFAC could be forthcoming at some point. This comports with reporting that a significant number of foreign financial institutions are still dealing with outstanding sanctions inquiries from U.S. regulators.
This does raise the question of how Iran will react to a post-deal parade of settlements involving foreign financial institutions for past Iran sanctions violations. The massive fines levied on HSBC and BNP Paribas have certainly put banks, particularly European banks on notice that violations of U.S. sanctions have significant consequences and have contributed to the general unwillingness to deal with Iran. While the Iran market is certainly attractive, new penalties may cause anxious banks to act more cautiously than Iranian authorities would prefer. The danger then is that Iran comes to believe the United States is not holding up its end of the JCPOA.
For the United States, foreign banks’ caution in reentering the Iranian market is probably in its interest, particularly given outstanding Anti-Money Laundering/Countering Terrorism Finance (“AML/CFT”) concerns. The key is to balance these concerns with the need to provide Iran compensation for its participation in the JCPOA. This may not require much additional action from the U.S. – the violations that led to massive penalties on banks seem to be the result of a misperception of the seriousness with which U.S. regulators viewed facilitation of dollar clearing on behalf of sanctioned counter parties and the reach of U.S. jurisdiction. Any such confusion is almost certainly gone at this point and additional enforcement actions may not meaningfully change how banks view Iran-related risk.