Yesterday, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC), announced their second massive penalty of the week when it was made public that HSBC was remitting $375 million dollars to settle allegations that HSBC, through its U.S. subsidiary, HSBC USA (HBUS), violated OFAC sanctions targeting Iran, Burma, Sudan, Cuba, and Libya. A large portion of the settlement agreement released by OFAC deals with HSBC’s relationship with Bank Melli in London, and how that relationship ultimately led, in part, to yesterday’s massive settlement. Below I have highlighted some of the key events that led to the Iran sanctions violations and yesterday’s action.

January 2001: HSBC Bank plc (HBEU) approaches HBUS with a proposal to clear dollar transactions for Bank Melli London through HBEU’s correspondent account utilizing SWIFT MT 202 cover payments that would not reference Bank Melli.

February 2001: HBUS concludes that the proposal is legal under U.S. laws and OFAC regulations.

April 2001: HBEU informs Bank Melli how to send payments in such a way as to hide Bank Melli as the sender of the funds.

June 2001: HBEU’s compliance manager sends an email to HBUS compliance informing them that Bank Melli has been directed to alter the format of its payments to allow for straight through processing.

July 2001: HBUS Compliance informs HSBC Group Compliance that the structuring of Bank Melli payments was a willful evasion of U.S. law and that the lack of transparency in the payment messages would be make it impossible to know if the transactions were otherwise authorized under U.S. law.

August 2003: HSBC’s Group Audit informs HSBC Group Compliance regarding the processing of Iranian payments.

October 2003: Email traffic between the Payments Department and HBEU’s Compliance Group confirms that the conduct described above is being carried out with HBEU Compliance’s knowledge and that the Payments Department had been requested to find ways to circumvent their own compliance filters.

September 2004: A directive is issued by HBEU’s CEO and HSBC Group Compliance to process the serial payments to HBUS in a transparent manner to allow them to carry out due diligence on the transactions in order to prevent the sanctions violations. The directive is not followed.

July 2005: HSBC Group Compliance issues a group wide policy prohibiting processing of U.S. dollar transactions in violation of OFAC regulations. The policy allowed for cover payments and Iranian U-turn transactions reviewed by a special compliance review team.

April 2006: HSBC Group Compliance issues a Group Compliance Letter (GLC) prohibiting the use of cover payments to process OFAC sensitive payments through the U.S.

October 25, 2006: HSBC Group Compliance issues a GCL directing a stop to all Iranian U.S. dollar payments, except for U turn transactions pursuant to contractual obligations, but otherwise including even U-turn transactions.

June 2007: HSBC Group Compliance announces an exiting of all Iranian business and account relationships with a hard deadline of November 30, 2007.

I entitled this post the “Upward Spiral” because as is evident from HSBC’s actions in 2006 and 2007, there was a concentrated effort to remedy the violations and deceptive practices they engaged in during the early to mid-2000s. Still, the events that unfolded at HSBC as retold through their settlement agreement with OFAC show that OFAC compliance efforts across a global financial institution can be disjointed, and often at odds with one another. Had HSBC taken HBUS’s advice from the beginning, there still may have been a penalty in this case, but it could have been greatly reduced.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com.